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. Equilibrium price and quantity of pizza decrease due to leftward shift in supply. b. Equilibrium price and quantity increase due to rightward shift in demand. c. Equilibrium price may decrease, and quantity increases due to rightward shift in supply. d. Equilibrium price and quantity decrease due to leftward shift in demand for an inferior good. e. Equilibrium price may decrease and quantity decreases due to leftward shift in demand.

Step-by-step solution

Analyze the Effect of a Price Rise in Mozzarella Cheese

When the price of mozzarella cheese increases, the cost of production for pizza increases as well, assuming cheese is a major ingredient. This results in a decrease in supply, because producers are less willing or able to supply the same quantity at each price. In a supply and demand diagram, the supply curve will shift to the left.

Assess the Impact of Health Concerns About Hamburgers

If hamburgers are found to be unhealthy and this information is widely publicized, consumers may shift away from consuming hamburgers to eating pizza, which may be considered a healthier alternative. This leads to an increase in the demand for pizza. The demand curve on a supply and demand diagram for pizza will shift to the right.

Determine the Consequences of a Price Drop in Tomato Sauce

A decrease in the price of tomato sauce, one of the ingredients for making pizza, would lower the overall cost of production for pizza makers. This generally results in an increased supply of pizza because producers can supply more at each price level. On the supply and demand diagram, the supply curve shifts to the right.

Understand the Effect of Rising Incomes on Inferior Goods

When the income of consumers increases, the demand for an inferior good typically decreases as consumers can afford to buy more preferable substitutes. Assuming pizza is an inferior good, there would be a decrease in demand. On the supply and demand diagram, the demand curve for pizza will shift to the left.

Examine the Impact of Expected Future Price Drop on Pizza

If consumers expect the price of pizza to drop next week, they may delay their purchases until the price goes down. This results in a decrease in the current demand for pizza. Consequently, the demand curve on the supply and demand diagram for pizza will shift to the left.

Key concepts

Equilibrium Price and Quantity

Understanding how prices and quantities are determined in a market is fundamental to grasping economic concepts. The equilibrium price is where the quantity of goods supplied equals the quantity demanded. Similarly, the equilibrium quantity is the output at which the quantity demanded is equal to the quantity supplied without excess or shortage.

When you look at a supply and demand diagram, the point where the supply curve intersects with the demand curve indicates the market equilibrium for price and quantity. Any change in the market, like an increase in the cost of mozzarella cheese, can disrupt this equilibrium by shifting either the supply or demand curve, thus leading to a new equilibrium price and quantity.

Shifts in Supply Curve

The supply curve is a graphical representation of the relationship between price and the amount of goods a producer is willing to supply. Various factors can cause this curve to shift.

When a fundamental cost of production, such as the price of mozzarella cheese, rises, the supply curve for pizza will shift to the left, indicating a decrease in supply for any given price. This shift portrays producers' reluctance or inability to produce at previous levels due to increased costs. Conversely, a decrease in the price of tomato sauce, a key ingredient, reduces production costs, shifting the supply curve to the right. This reflects an increase in the quantity of pizza that producers are willing to supply at any given price.

Shifts in Demand Curve

The demand curve shows the quantities of a good that consumers are willing to purchase at different prices. It can shift due to several reasons, including changes in consumer preferences, incomes, prices of related goods, and expectations about future prices.

For instance, if health concerns about hamburgers arise, consumers might switch to pizza, shifting the pizza demand curve to the right. This increase in demand leads to a higher equilibrium price and quantity for pizza. Alternatively, if pizza is viewed as an inferior good and consumer incomes rise, the demand for pizza decreases, shifting the demand curve to the left, resulting in a lower equilibrium price and quantity.

Effects of Cost Changes on Supply

Cost changes can significantly affect supply. A rise in the costs of production inputs, like mozzarella cheese, typically leads to a lower quantity supplied at any given price—due to increased costs eating into profits—causing a leftward shift in the supply curve.

However, some cost changes can positively impact supply. For example, cheaper tomato sauce reduces production expenses, enabling producers to offer more pizza at lower prices, reflected in a rightward shift of the supply curve. These cost changes directly influence the equilibrium position in the market by altering the supply outlook.

Consumer Behavior and Demand

Consumer behavior is a key driver of demand in any market. Factors such as income levels, tastes and preferences, and price expectations dictate the patterns of consumer purchases.

For example, when consumers expect that the price of pizza will decrease in the future, they may hold off on buying pizza now. This anticipation negatively impacts the current demand for pizza, resulting in a leftward shift in the demand curve. Additionally, as incomes rise, the demand for inferior goods like pizza may decrease, leading to similar shifts. Understanding these behavior patterns is crucial for projecting demand curves and anticipating market changes.