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

a. Supply decreases, price increases, quantity decreases. b. Demand increases, price and quantity increase. c. Demand decreases, price and quantity decrease. d. Supply increases, price decreases, quantity increases.

Step-by-step solution

Effect of Drought on Dairy Supply

A severe drought would likely decrease the supply of dairy products as farmers have fewer cattle to produce milk, which is a key ingredient in ice cream. This will shift the supply curve for chocolate ice cream to the left, representing a decrease in supply. The decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity of chocolate ice cream.

Impact of Health Benefits Report on Demand

A new report touting health benefits of chocolate will increase consumer demand for chocolate ice cream as it becomes more desirable. This will shift the demand curve to the right, indicating an increase in demand. The result is an increase in both equilibrium price and quantity of chocolate ice cream.

Effect of Cheaper Synthetic Vanilla Flavoring

The discovery of cheaper synthetic vanilla flavoring will make vanilla ice cream less expensive, drawing some consumers away from chocolate ice cream. This decrease in demand for chocolate ice cream shifts the demand curve to the left, leading to a decrease in equilibrium price and quantity of chocolate ice cream.

Consequences of New Ice Cream Technology

The introduction of new technology that reduces manufacturing costs for chocolate ice cream lowers producers' costs. This will lead to an increase in the supply of chocolate ice cream, shifting the supply curve to the right. The result will be a decrease in the equilibrium price and an increase in the equilibrium quantity of chocolate ice cream.

Key concepts

Supply and Demand Shifts

Understanding the dynamics of supply and demand is essential for analyzing market changes. A shift in the supply curve occurs when there is a change in the quantity supplied at every price point. Similarly, a shift in the demand curve represents a change in the amount of a product that consumers are willing to buy at every price. Causes for these shifts include changes in production costs, technological advances, consumer preferences, and external economic factors.
For example, a severe drought (as in the provided exercise) reduces the availability of dairy products, leading to a leftward shift in the supply curve for chocolate ice cream. On the other hand, positive health information can boost the product's desirability, shifting the demand curve rightward, as people are willing to purchase more even if the price increases.

Equilibrium Price

The equilibrium price is the price at which the quantity of goods suppliers are willing to sell equals the quantity consumers are willing to buy. It is found where the demand and supply curves intersect. When an event causes the supply or demand curve to shift, the equilibrium price changes accordingly. A leftward shift in the supply curve, indicative of a lower quantity of goods available, typically raises the equilibrium price because of scarcity. Conversely, a rightward shift in the supply curve, signaling more abundant goods, can lower the equilibrium price due to increased availability.

Equilibrium Quantity

Equilibrium quantity is the quantity of goods bought and sold at the equilibrium price. Any shift in supply or demand affects the equilibrium quantity. A drought reducing the supply of cream for ice cream, as mentioned in the exercise, curtails the equilibrium quantity because there is less chocolate ice cream available for sale. However, if the reduction in production costs due to new technology leads to an increased supply, the equilibrium quantity of chocolate ice cream rises, assuming demand holds steady.

Market Effects of Technology

Technological improvements can significantly impact the supply of goods in a market. Innovations that reduce production costs, such as the mixing and freezing technology mentioned for ice cream, can shift the supply curve to the right. This results in a lower equilibrium price and a higher equilibrium quantity as companies are able to offer more goods at a lower price. The cost savings from technology can also enhance product quality or introduce new features, which can further affect supply and demand dynamics.

Impact of Health Information on Demand

Health information can influence consumer preferences and demand for products. For instance, the revelation that chocolate has health benefits is likely to increase demand for chocolate ice cream. Consumers' perception of health benefits can cause a rightward shift in the demand curve, as they are more willing to buy the product even at higher prices. This increase in demand can lead to a higher equilibrium price and quantity, reflecting the product's enhanced value in the eyes of consumers.