Exercise No.1
1. Using supply-and-demand diagrams, show the effect of the following events on the market for
cotton shirts.
a. A flood in China damages the cotton crop.
b. The price of silk shirts falls.
c. All colleges require each student to purchase an additional pair of school uniform.
d. New sewing machines are invented.
Answer:
a. When a flood in China damages the cotton crop, it raises input prices for producing
cotton shirts. As a result, the supply of cotton shirts shifts to the left. The new
equilibrium has a higher price and lower quantity of cotton shirts.