Chapter - 2.6.1 at save my exam economics

• Demand for lobsters in Maine, USA has been falling steadily in recent months

  
  

• This has resulted in a price fall from $12.35 /pound on the 1st April to $9.35 /pound on the 1st May

Diagram Analysis

• In recent months the USA has been experiencing an increasing rate of inflation

  • Inflation lowers the purchasing power of money in a consumer's pocket & so effectively reduces their real income

  • With reduced real income fewer luxuries are consumed

  • This led to a decrease in demand for lobsters from D1→D2

    
    

     

• At the original market clearing price of P1, a condition of excess supply now exists

  • The demand for lobsters is less than the supply

    
    

     

• In response, suppliers gradually reduce prices

  • This causes a contraction of supply & an extension of demand leading to a new market equilibrium at P2Q2

  • Both the equilibrium price (P2) & the equilibrium quantity (Q2) are lower than before

  • The excess supply in the market has been cleared

Real World Example: Changes to Supply That Decrease Price

• In order to help meet their climate targets & to lower energy costs for households, the EU is providing subsidies for solar panels 

Diagram Analysis

• To help meet its climate change targets & lower household energy bills the EU has provided a subsidy to solar panel retailers

  • This causes an increase in supply of S1→S2

    
    

     

• At the original market clearing price of P1, a condition of excess supply now exists (surplus)

  • The supply of solar panels is greater than the demand

    
    

     

• In response, sellers in the EU lower prices

  • This causes an extension of demand & a contraction of supply leading to a new market equilibrium at P2Q2

  • The equilibrium price (P2) is lower & the equilibrium quantity (Q2) is higher than before

  • The excess supply in the market has been cleared