Typically, some factor, other
Typically, some factor, other than the product’s own price, iseither a determinant of the quantity demanded, or the quantitysupplied. When it comes to the market for ice cream, however,frozen yogurt is an exception. As you saw, frozen yogurt is both asubstitute in consumption and a substitute in production (becausefirms that make ice cream usually also produce frozen yogurt). Weexamined how a change in the price of frozen yogurt affects thedemand side and the supply side of the market for ice creamindependently. Let us now focus on the entire picture. Startingfrom the equilibrium position in the market for ice cream, supposethat the price per unit of frozen yogurt rose. In a SINGLE diagram,a) illustrate graphically what will happen to the market demandcurve and the market supply curve for ice cream and show theultimate equilibrium point, equilibrium price per unit of ice creamand equilibrium quantity of ice cream after this change. b) Howdoes the ultimate equilibrium price of ice cream compare with theoriginal equilibrium price? How does the ultimate equilibriumquantity of ice cream compare with the original equilibriumquantity? Provide a very short explanation for your answers. If youthink that, in addition to the case depicted in your diagram inpart a), there may be other possibilities, illustrate each of themgraphically next to the first diagram.
Answer:
Frozen yogurt and ice cream are substitute goods in both demandand supply. So if the price of frozen yogurt increases, the supplyof yogurt would increase because the sellers are willing to supplymore of the good at a higher price. So the supply of ice creamwould reduce.
The demand would reduce for yogurt as the price increases andthe demand for ice cream increases as they are substitutegoods.
Since we do not know the proportion of change or level ofsubstitutability of the goods, there would be three cases.
This would be the first case wherein the demand and supplychange by same proportion ie the supply of ice cream reduces,shifting the supply curve to left, and the demand increases,shifting the demand curve to right. The new equilibrium price isgiven by P*.
This is the second case wherein the demand increases by a lesserproportion than the supply decrease. The new equilibrium price andquantity is given by P’ and Q’.
This is the third case wherein the increase in demand is morethan reduction in supply.
The new equilibrium price and quantity is given by P’ andQ’.
b) In all cases, the price would definitely rise because thedemand is increasing and supply is decreasing. But due to differentproportions, the equilibrium quantity could be greater, less orequal to the original one and hence is indeterminant in nature.Also the equilibrium would always be above the originalequilibrium.
(you can comment for doubts)
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