Full Answer Section

• Low Income Share:For low-income households, junk food can be a relatively inexpensive source of calories. A price increase might not deter them from purchasing it.

However, a tax on junk food could have other effects:

• Reduced Consumption Over Time:While a one-time price increase might not significantly impact consumption, a sustained tax could gradually nudge people towards healthier choices, especially if healthier alternatives become more affordable.
• Increased Awareness:A tax on junk food can spark public conversation about healthy eating habits, potentially influencing consumer behavior beyond just price.

(ii) Elastic vs. Inelastic Demand

• Elastic Demand:When a price change leads to a significant shift in the quantity demanded, demand is considered elastic. For example, if the price of movie tickets increases significantly, many people might choose to forgo movies or find cheaper alternatives.
• Inelastic Demand:When a price change has a minimal effect on the quantity demanded, demand is considered inelastic. For instance, even with rising gasoline prices, people who rely on cars for essential needs might have limited options and continue to purchase gas.

Market Equilibrium in Action: A Personal Example

(i) Shifting Market Equilibrium: Streaming Services

Think about the market for cable television. Traditionally, cable TV providers dominated the market for home entertainment. However, the rise of streaming services like Netflix and Hulu represents a significant change in the market.

• Shift in Preferences:Consumer preferences have shifted towards on-demand content and the flexibility of streaming services. This decreased demand for traditional cable TV.
• Technological Change:Streaming services leverage the internet, a readily available technology, making them more accessible.
• Price of Alternative Goods:Streaming services often offer lower subscription fees compared to cable TV packages, further impacting demand.

The combined effect of these changes is a leftward shift in the demand curve for cable TV. As demand decreases, cable companies might be forced to lower prices or offer bundled packages to compete. This is an example of how changes in the market can disrupt existing equilibrium and lead to adjustments from suppliers.

(ii) Market Equilibrium

Market equilibrium is the point where the quantity demanded by consumers equals the quantity supplied by producers at a specific price. This price is known as the equilibrium price, and it represents a balance between buyers and sellers.

Any changes in the factors influencing demand or supply will disrupt this equilibrium. If demand increases or supply decreases, the price will tend to rise until a new equilibrium is reached. Conversely, if demand decreases or supply increases, the price will tend to fall until a new equilibrium is established.