Question

A survey indicated that chocolate is the most popular flavor of ice cream in America. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream. a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream. b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits. c. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. d. New technology for mixing and freezing ice cream lowers manufacturers' costs of producing chocolate ice cream.

Short answer

Answer: The Midwest drought would lead to a decrease in the supply of chocolate ice cream due to higher production costs. This would not affect the demand for chocolate ice cream. As a result, the equilibrium price would increase, and the equilibrium quantity would decrease.

Step-by-step solution

Scenario a: Midwest drought and dairy farmers reducing milk-producing cattle

The severe drought will cause dairy farmers to reduce the number of milk-producing cattle, which will lead to a reduction in the supply of cream used to manufacture chocolate ice cream. This is a change in the input cost for producing chocolate ice cream and hence will affect the supply of ice cream. Effect on Supply: Decrease As the supply of a key ingredient (cream) decreases, the production cost of chocolate ice cream will increase, leading to a decrease in the supply of chocolate ice cream. Effect on Demand: No change The drought does not affect the preferences or incomes of the consumers directly. Hence, the demand for chocolate ice cream will not change. Equilibrium Price: Increase Equilibrium Quantity: Decrease With a decrease in supply and no change in demand, the equilibrium price will increase, and the equilibrium quantity will decrease.

Scenario b: Health benefits of chocolate revealed

A new report stating that chocolate offers health benefits will affect the demand for chocolate ice cream. Effect on Supply: No change The new report does not affect the production cost or methods of producing chocolate ice cream. Hence, the supply of chocolate ice cream will not change. Effect on Demand: Increase The report informs consumers of additional benefits of consuming chocolate, leading to an increase in the demand for chocolate ice cream due to improved consumer perception. Equilibrium Price: Increase Equilibrium Quantity: Increase With an increase in demand and no change in supply, the equilibrium price and quantity will both increase.

Scenario c: Cheaper synthetic vanilla flavoring

The discovery of cheaper synthetic vanilla flavoring will affect the price of vanilla ice cream, a substitute good for chocolate ice cream. Effect on Supply: No change The cheaper synthetic vanilla flavoring does not impact the production cost or methods of producing chocolate ice cream. Hence, the supply of chocolate ice cream will not change. Effect on Demand: Decrease As the price of vanilla ice cream decreases, some consumers may switch from chocolate to vanilla ice cream, leading to a decrease in demand for chocolate ice cream. Equilibrium Price: Decrease Equilibrium Quantity: Decrease With a decrease in demand and no change in supply, the equilibrium price and quantity will both decrease.

Scenario d: New technology lowers production costs

The introduction of new technology that reduces the cost of producing chocolate ice cream will affect its supply. Effect on Supply: Increase As the production cost decreases due to the new technology, manufacturers can produce more chocolate ice cream at lower costs, resulting in an increase in supply. Effect on Demand: No change The new technology does not affect the preferences or incomes of the consumers directly. Hence, the demand for chocolate ice cream will not change. Equilibrium Price: Decrease Equilibrium Quantity: Increase With an increase in supply and no change in demand, the equilibrium price will decrease, and the equilibrium quantity will increase.

Key concepts

Equilibrium Price

The concept of equilibrium price is a fundamental aspect of supply and demand economics. It occurs at the point where the quantity of a good demanded by consumers equals the quantity supplied by producers. Simply put, it's the "meeting point" of buyers and sellers in the market.
This price is determined by the intersection of the supply and demand curves on a graph.

• When demand increases (like when a study shows chocolate has health benefits), the equilibrium price tends to rise, because more people are interested in buying the product.
• On the flip side, an increase in supply (perhaps due to cheaper production technology) might lower the price, as there are more products available.

Understanding equilibrium price helps businesses decide how much to charge customers and helps ensure resource efficiency in the marketplace.

Equilibrium Quantity

Similar to equilibrium price, equilibrium quantity is the amount of goods that are bought and sold when the market is in balance. This is where supply and demand are perfectly matched.
Consider the scenario where input costs for producing chocolate ice cream rise. If fewer suppliers can produce at the same cost, the supply curve shifts left, potentially decreasing the equilibrium quantity as less product is available at the normal price.

• If a new technology reduces production costs (like it did for chocolate ice cream), the equilibrium quantity will likely increase, as producers can afford to produce more goods without losing money.
• An increase in demand (like when chocolate ice cream is discovered to have health benefits) will also increase equilibrium quantity as long as suppliers can meet the new demand levels.

Equilibrium quantity is crucial for understanding how much of a product will naturally be sold without surplus or shortage at the equilibrium price.

Input Costs

Input costs are the expenses incurred in the production of goods or services. They play a significant role in determining the supply and potentially the price of products.
When these costs rise, such as through a drought affecting dairy supply, production becomes costlier. This generally leads to a decrease in supply, since producers might not be able to cover increased costs at current prices.

• If input costs decrease through technological advances or cheaper substitutes, supply can increase since production becomes more affordable.
• Any change in input costs typically affects the entire supply chain, influencing what consumers ultimately pay.

Manufacturers constantly strive to manage input costs to maintain profitability without negatively impacting supply.

Consumer Perception

Consumer perception refers to how customers view a product, which can significantly influence demand. Perception is often shaped by factors such as advertising, consumer reviews, and reports, like when health benefits of chocolate are revealed.

• If consumers perceive a product positively, demand is likely to increase, causing potential rises in price and sales volume.
• Conversely, if a product falls out of consumer favor, perhaps due to new substitutes or negative information, demand can drop.

Consumer perception doesn't always relate to the physical attributes of the product. It can also be influenced by trends, economic conditions, and cultural shifts, impacting both short-term demand and long-term market dynamics.