Consider the various factors that determine the demand for and supply of "normal good" X. How would the price and equilibrium output of that good be affected by the following developments (be sure to explain the reasoning you have used):
a. The economy seems to be entering an inflationary period.
b. Consumer incomes are rising.
c. Labor productivity is increasing.
d. The price of substitute goods is falling.

Question

Quizplus · Accepted Answer

The Answer is The demand for and supply of a "normal good" X is determined by various factors such as consumer preferences, income levels, prices of related goods, and overall economic conditions.

a. If the economy seems to be entering an inflationary period, the price of "normal good" X is likely to increase. This is because inflation typically leads to higher prices for goods and services, causing consumers to have less purchasing power. As a result, the demand for "normal good" X may decrease, leading to a decrease in equilibrium output.

b. If consumer incomes are rising, the demand for "normal good" X is likely to increase. This is because consumers have more disposable income to spend on goods and services, leading to an increase in demand for "normal good" X. As a result, the price and equilibrium output of the good may increase.

c. If labor productivity is increasing, the supply of "normal good" X is likely to increase. This is because higher productivity leads to lower production costs, allowing producers to supply more of the good at a lower price. As a result, the price of "normal good" X may decrease, leading to an increase in equilibrium output.

d. If the price of substitute goods is falling, the demand for "normal good" X is likely to decrease. This is because consumers may switch to the cheaper substitute goods, leading to a decrease in demand for "normal good" X. As a result, the price and equilibrium output of the good may decrease.

In conclusion, the price and equilibrium output of "normal good" X are affected by various developments such as inflation, changes in consumer incomes, labor productivity, and the price of substitute goods. These factors can lead to changes in demand and supply, ultimately impacting the price and equilibrium output of the good.

Consider the Various Factors That Determine the Demand for and Supply