Question

What are the advantages and disadvantages of the increasing price of wheat on bakery owners?

Answer 1

Since wheat is used as a raw material for bakery products, an inccrease in price of wheat will lead to increase in cost of production of bakery products.This increase will shift the marginal cost (MC) curve upward. Now, less quantity will be supplied at each price level.

Advantages: An increase in price of wheat will also lead to increase in price of bakery products. Higher prices for a product generally act as an incentive for producers since they also mean higher profits.

Disadvantages: Since price of a commodity is inversely related with its quantity demanded due to operation of law of diminishing marginal utility (more is only bought at lesser prices), an increased price of bakery products will tend to affect its demand. It bakery products are norma goods for consumers, its quantity demanded will decrease at higher prices. People may also shift to substitutes of bakery products.