Question

Use a diagram to illustrate how each of the following events affects the equilibrium price and quantity of pizza. a. The price of mozzarella cheese rises. b. The health hazards of hamburgers are widely publicized. c. The price of tomato sauce falls. d. The incomes of consumers rise and pizza is an inferior good. e. Consumers expect the price of pizza to fall next week.

Short answer

a. The price of mozzarella cheese rises. b. The health hazards of hamburgers are widely publicized. c. The price of tomato sauce falls. d. The incomes of consumers rise and pizza is an inferior good. e. Consumers expect the price of pizza to fall next week. Answer: a. Equilibrium price increases, and equilibrium quantity decreases. b. Equilibrium price and quantity both increase. c. Equilibrium price decreases, and equilibrium quantity increases. d. Equilibrium price and quantity both decrease. e. Equilibrium price and quantity both decrease.

Step-by-step solution

a. The price of mozzarella cheese rises.

When the price of mozzarella cheese increases, it becomes more expensive for pizza producers to make pizza. This results in a decrease in the supply of pizzas. In this situation, we expect the supply curve to shift to the left, as shown in the diagram below. This will cause the equilibrium quantity of pizzas to fall and the equilibrium price to rise. Diagram: Supply curve shifts to the left

b. The health hazards of hamburgers are widely publicized.

If the health hazards of hamburgers are widely publicized, consumers may be discouraged from eating hamburgers and are more likely to buy pizza as an alternative. This change in consumer preferences can lead to an increase in the demand for pizza. In this case, the demand curve would shift to the right, as shown in the diagram below. As a result, both the equilibrium quantity and price of pizza would increase. Diagram: Demand curve shifts to the right

c. The price of tomato sauce falls.

When the price of tomato sauce decreases, it becomes cheaper for pizza producers to make pizza, which results in an increase in the supply of pizzas. In this situation, we expect the supply curve to shift to the right, as shown in the diagram below. This will cause the equilibrium quantity of pizzas to rise and the equilibrium price to fall. Diagram: Supply curve shifts to the right

d. The incomes of consumers rise and pizza is an inferior good.

When incomes increase and pizza is considered an inferior good, the demand for pizza would decrease because consumers are more likely to buy higher-quality alternatives. In this case, the demand curve would shift to the left, as shown in the diagram below. This would lead to a decrease in both the equilibrium quantity and price of pizza. Diagram: Demand curve shifts to the left

e. Consumers expect the price of pizza to fall next week.

If consumers expect the price of pizza to fall next week, they may be less likely to buy pizza this week, thinking that they can purchase pizza at a lower price later on. This can lead to a decrease in the current demand for pizza. In this situation, the demand curve would shift to the left, as shown in the diagram below. As a result, both the current equilibrium price and quantity of pizza would decrease. Diagram: Demand curve shifts to the left

Key concepts

Supply and Demand

Supply and demand form the backbone of any economic market and play a crucial role in determining the equilibrium price and quantity for goods, such as pizza. At its core, demand refers to how much of a product consumers are willing and able to purchase at different prices, while supply refers to how much producers are willing and able to sell.

The equilibrium price is the point where the quantity supplied equals the quantity demanded. A change in either supply or demand affects the equilibrium, resulting in a shift of the supply or demand curve. This, in turn, changes the price and quantity of the product in focus. For example, if cheese, a key ingredient in pizza, becomes more expensive, the supply curve will shift leftward, leading to a higher equilibrium price and lower quantity produced. Understanding these shifts can help predict how changes in the market influence competition and pricing.

Inferior Goods

Inferior goods are unique; they behave differently compared to normal goods when consumer income changes. For inferior goods, demand decreases as consumer incomes rise, and vice versa. This relationship arises because as people have more disposable income, they tend to opt for higher-quality or more expensive alternatives.

In our pizza market example, if consumer incomes rise and pizza is seen as an inferior good, the demand for pizza will decrease. This leads to a leftward shift in the demand curve, ultimately decreasing both the equilibrium price and quantity of pizza. Recognizing the nature of inferior goods is essential for businesses targeting various income segments, as they must adapt their offerings to consumer demand trends.

Consumer Preferences

Consumer preferences significantly impact market dynamics, as they determine what products are in demand. These preferences can be influenced by various factors, including health information, trends, and social norms. When consumer preferences shift, so does the demand.

For example, if new health information reveals that hamburgers have health hazards, consumers may begin to prefer pizza as a healthier option. This could cause the demand for pizza to increase. The demand curve shifts to the right, leading to an increase in both the equilibrium price and quantity of pizza. Understanding consumer preferences is crucial for businesses to predict changes in demand and adjust their strategies accordingly.

Supply Curve

The supply curve is an essential tool in economics, illustrating the relationship between the price of a product and the quantity that producers are willing and able to supply. Typically, the supply curve slopes upward from left to right, indicating that at higher prices, producers are willing to supply more of a product.

However, changes in production costs, such as the cost of mozzarella cheese for pizza, can shift the supply curve. If production costs increase, the supply curve shifts to the left, indicating a decrease in the quantity supplied at any given price. Conversely, if production costs fall, as seen with tomato sauce, the supply curve shifts to the right, suggesting an increase in quantity supplied. Understanding these shifts helps businesses and economists anticipate how external factors can impact market supply.

Demand Curve

The demand curve in economic analysis represents the relationship between the price of a good and the quantity that consumers are willing to purchase. It usually slopes downward from left to right, indicating that as prices decrease, consumers purchase more of the good, and vice versa.

Several factors can influence the demand curve, causing it to shift. For instance, if consumers anticipate a future price drop for pizza, they might purchase less in the present, causing the demand curve to shift to the left. Similarly, if a complementary product like hamburgers faces negative publicity, consumers may switch to buying more pizza, shifting the demand curve to the right. These shifts in the demand curve are crucial for understanding how market expectations and substitution effects influence consumer behavior.