Question

1. Draw the supply and demand curves for frozen yogurt. Show equilibrium.

2. Show and explain what will be the first thing that will happen in the market for frozen yogurt when each of the following occurs. Please show the original curves and the change so that it is clear what the change is.

• Price of frozen yogurt increases
• Rent for the frozen yogurt store decreases
• Price of milk increases
• The government determines that frozen yogurt is hazardous to your health.

Answer 1

1) The supply and demand curves for frozen yogurt are shown below where E is the equilibrium.

2. Price of frozen yogurt increases: This will bring a surplus in the market because when price of a good rises, quantity demanded falls and quantity supplied rises.

Rent for the frozen yogurt store decreases. This reduces cost of production and so more frozen yogurt is produced. Supply increases. This implies a rightward shift of supply curve raising the quantity and reducing the price.

Price of milk increases. This is a major input so it raises the cost of production and so less frozen yogurt is produced. Supply decreases. This implies a leftward shift of supply curve raising the price and reducing the quantity.

The government determines that frozen yogurt is hazardous to your health. This discourages consumers to demand same yogurt. Hence demand decreases. This implies a leftward shift of demand curve reducing the price and the quantity.