Question

Table 3.9 illustrates the market's demand and supply for cheddar cheese. Graph the data and find the equilibrium. Next, create a table showing the change in quantity demanded or quantity supplied, and a graph of the new equilibrium, in each of the following situations: a. The price of milk, a key input for cheese production, rises, so that the supply decreases by 80 pounds at every price. b. A new study says that eating cheese is good for your health, so that demand increases by \(20 \%\) at every price.

Short answer

In the initial situation, the equilibrium point is at a price of $3.40 with a quantity of 650 pounds. When the supply decreases by 80 pounds at every price, the new equilibrium is at a price of $3.60 and a quantity of 620 pounds. When the demand increases by \(20 \%\) at every price, the new equilibrium is at a price of $3.80 and a quantity of 720 pounds.

Step-by-step solution

Graph the Initial Demand and Supply Curves

: To graph the initial demand and supply, plot the price per pound on the vertical axis (y-axis) and the quantity demanded/quantity supplied on the horizontal axis (x-axis). Connect the points for each curve.

Find the Initial Equilibrium Point

: The equilibrium point is the point at which the demand and supply curves intersect. In this case, the equilibrium point is when the price per pound is $3.40 and the quantity demanded/supplied is 650 pounds.

Adjust the Supply or Demand According to the Given Situations

: a. The supply decreases by 80 pounds at every price due to the increase in milk price. b. The demand increases by \(20 \%\) at every price due to the new study stating that cheese is good for your health.

Create New Tables and Graphs Representing the New Equilibriums

: a. New table after the supply decreases by 80 pounds at every price: \begin{array}{l|l|l} \hline {\text { Price per Pound }} & {\text { Qd }} & {\text { New Qs }} \\\ \hline \$ 3.00 & 750 & 460 \\\ \hline \$ 3.20 & 700 & 520 \\\ \hline \$ 3.40 & 650 & 570 \\\ \hline \$ 3.60 & 620 & 620 \\\ \hline \$ 3.80 & 600 & 640 \\\ \hline \$ 4.00 & 590 & 650 \\\ \hline \end{array} New equilibrium point: Price per pound = $3.60 and Quantity = 620 pounds. b. New table after the demand increases by \(20 \%\) at every price: \begin{array}{l|l|l} \hline {\text { Price per Pound }} & {\text { New Qd }} & {\text { Qs }} \\\ \hline \$ 3.00 & 900 & 540 \\\ \hline \$ 3.20 & 840 & 600 \\\ \hline \$ 3.40 & 780 & 650 \\\ \hline \$ 3.60 & 744 & 700 \\\ \hline \$ 3.80 & 720 & 720 \\\ \hline \$ 4.00 & 708 & 730 \\\ \hline \end{array} New equilibrium point: Price per pound = $3.80 and Quantity = 720 pounds. Now, create graphs for each situation with the new demand and supply curves and the new equilibrium points.

Key concepts

Demand and Supply Curves

In any market, the demand and supply curves are fundamental tools used to depict how a product is traded.
They illustrate the relationship between prices and the quantities demanded or supplied.
For cheddar cheese, as an example, the demand curve displays how many pounds buyers are willing to purchase at different price levels.

• Demand Curve: A downward-sloping curve that suggests consumers will buy more at lower prices.
• Supply Curve: An upward-sloping curve that indicates producers will supply more at higher prices.

The initial demand and supply curves intersect at an equilibrium point—in this case, at a price of $3.40 per pound with a quantity of 650 pounds. This is where the market naturally settles, balancing the quantity consumers wish to buy with what producers are willing to sell.
Shifts in these curves occur when external factors affect market conditions, leading to new equilibrium points.

Price Changes

Price changes serve as signals within a market, affecting both consumers and producers.
In the context of cheddar cheese, any shift in price can lead to adjustments in market supply and demand, thus altering the equilibrium. A real-world example is when the cost of producing cheese increases due to a rise in milk prices.
This scenario pushes the supply curve leftward—indicating a decrease in supply at existing prices.

• With reduced supply, the quantity of cheese available at each price drops, resulting in a new equilibrium with a lower supply at a higher price, as seen in the listed scenario where the price goes up to $3.60, and the quantity decreases to 620 pounds.

Conversely, if demand increases because of positive health studies about cheese consumption, the demand curve shifts to the right.
Increased consumer interest translates to higher sales at existing prices, prompting a new equilibrium.
Here, the equilibrium price elevates to $3.80, and the quantity rises to 720 pounds, reflating enhanced demand.

Quantity Demanded

Quantity demanded refers to the amount of a product consumers are willing to buy at a specific price.
This concept is sensitive to price changes and influences whether a market is in equilibrium or requires adjustment. In the example of cheddar cheese, the original quantity demanded at $3.40 was 650 pounds.
Factors influencing quantity demanded include consumer preferences and price levels.

• Price Increase Effect: Usually results in a lower quantity demanded, as products become pricier and less accessible to budget-conscious consumers.
• Price Decrease Effect: Often results in a higher quantity demanded, as customers find the product more affordable.

When demand increased by 20% across all prices due to health claims, the quantity demanded swelled, shifting the demand curve right.
Such percent changes illustrate how sensitive quantity demanded is to external perceptions and market environments. Understanding how quantity demanded fluctuates helps predict how a market might respond to policy changes, input costs, or consumer trends.