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Suppose the demand for bagels rises dramatically while the demand for breakfast cereal falls. Briefly explain how the competitive market economy will make the needed adjustments to reestablish an efficient allocation of society”s scarce resources?
Solution: When the demand for bagel rises dramatically, supply remaining the same, the demand curve for bagel shifts to the right. As a result, the equilibrium price and quantity ,both increase. Now, when the demand for breakfast cereal falls, supply remaining constant, the demand curve for breakfast cereal shifts to the left, as a result of which equilibrium price and quantity both fall. Thus, resources are shifted from the breakfast cerealmarket, where demand falls, as a result of…

which competitive forces come into action and the equilibrium price and quantity fall and consequentlythe resources are shifted from the breakfast cereal market to the bagel market. This is how the competitive economy will make the needed adjustments to reestablish an efficient allocation of society’s scarce resouces.

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