Question

Assume that steak is a normal good. Several people have lost their job in the wake of the coming recession, leading to a loss in consumer incomes. Draw a supply and demand diagram.  Also, write WHY the curve (or curves) is (are) shifting based on the shift factors for demand and supply.  What is happening to the equilibrium price and quantity in each problem? Remember the concept of ceteris paribus.  

Answer 1

According to your question, you want to know what happens to the supply and demand curves when people lose their jobs and there is a loss in consumer incomes. Ceteris paribus means that "all else remains equal" while considering the problem constraints. Therefore, we work with the assumption that only the factors given in the problem affect the supply-demand diagram, and no other external factor is to be considered.  

Now, due to recession, many people lose their jobs, reducing incomes. In this case, the decrease in income would lead to a lower quantity of goods demanded, and the original demand curve D₀ would shift left to D₂. The shift from D₀ to D₂ represents such a decrease in demand: At any given price level, the quantity demanded is now lower. We can see this in the graph.


AL Quantity


When a demand curve shifts, it does not mean that the quantity demanded by every individual buyer changes by the same amount. Rather, it encapsulates the general trends of the market as a whole.

Now, what happens to the supply curve? Note that, the supply curve shifts under the following conditions:
1. Favourable/poor natural conditions
2. Fall/rise in input prices
3. Technology
4. Taxes
In this case, assuming ceteris paribus, we know that loss of jobs will not affect the supply curve. Thus, the demand curve will shift on the supply curve, resulting in lower equilibrium price and quantity.


1 2 2 Q2 Q1 Quantity


If, ceteris paribus is not mentioned, we can assume that the recession led to a rise in input prices, in which case, the supply curve also shifts to the left. Hope this helps!