Question

: Assume the market for Pepsi, the soft drink, is in equilibrium. For each of the following, (1) indicate whether the demand for Pepsi or the supply of Pepsi or both the supply and demand for Pepsi changes; (2) explain why the curve is shifting; (3) draw a graph illustrating the effect of the change on the equilibrium price and quantity of Pepsi; and (4) verbally explain what happens to the equilibrium price and quantity of Pepsi. Analyze each event independently.

1. PepsiCo, the producer of Pepsi, invents a more efficient process to bottle Pepsi.

2. The supply of Coca Cola decreases.

3. The price of sugar and high-fructose corn syrup, ingredients in Pepsi, increase.

4. The Surgeon General of the United States announces that drinking soft drinks increases the risk of dying by 10 percent.

5. Both of the events described in parts (a) and (d) above, occur simultaneously.

Answer 1

a. This makes the pepsi production process more efficient allowing to produce more pepsi bottles at every given price level. Thus supply curve shifts to the right. This causes the equilibrium price to fall and equilibrium quantity to rise.

b. The supply decreases so supply curve shifts to the left. This causes less quantity to be supplied at a higher equilibrium price.

c.The input cost of making pepsi rises. This causes less quantity to be supplied at every level of price. Thus supply curve shifts to the left causing a decrease in equilibrium quantity and increase in equilibrium price of pepsi.

d. The surgeon's announcement make people skeptical and wary about pepsi consumption. Hence people decrease consumption of pepsi. So demand decreases and shifts left. This causes equilibrium price and quantity to decrease.

e.When both events occur together. Both curves shift. Due to efficient production process supply shifts right which causes price to decrease and quantity to increase. On the other hand the surgeon's announcement decreased demand and caused price and quantity to decrease. Both demand and supply forces drive down prices causing equilibrium price to fall by a double. While opposing forces work on the equilibrium quantity, supply increases it and demand decreases it thus nullyfing each other and there is no change in equilibrium quantity.