The first thing you need to understand is what is what in that graph. It can look kind of intimidating with just all those letters. I'm going to list below the definitions:
- S - Supply Curve
- D - Demand Curve
- Q - Quantity
- Qe - Equilibrium quantity
- Pe - Equilibrium price
So, the graph is showing what is the Quantity (x-axis) supplied or demanded at a given price (y-axis). The equilibrium price is where the supply and demand curve cross. That is, the quantity supplied is the same as the quantity demanded.
With that done, let's do the first part of the problem.
a) Before doing anything, just stop and think about it. Does an ad campaign make it so that companies want to sell more products at a set price or make it so that more people want to buy it at a set price? A campaign is meant to convince people to buy more or let more people know about a certain product. That means that it will affect Demand, not Supply.
Since the ad campaign is successful, we can assume that it will cause an increase of demand. But the question now, is it an increase of quantity demanded or in the actual demand? There is a simple way to tell. If it is a change in price, then it is a change along the curve. That makes it an increase in quantity demanded. If it is a change in things outside of price, it can be a shift of the curve, making it an increase in the demand.
In this case, an ad campaign will either change the taste, making more people thing the product is desirable, or it will increase the number of people who know about the product. Either way, it is an increase in the demand, shifting the curve to the right.
Now that you know that, look at the equilibrium (where the lines cross) if you move the demand curve to the right. The place where they cross also moves to the right (and up the supply curve). That means that the equilibrium demand and the equilibrium supply both increase. Since that is the case, the equilibrium price also increases!
That is just the first part of this problem, and it covers the basics. Answering all the other ones would be a bit long for an "easy question", though. I hope that this helps you out!
Mar 11th, 2015
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