Question

Consider the competitive market for baked goods in the country of Tazenda. News articles about the negative health consequences of obesity have been prevalent. At the same time, a key ingredient in many baked goods – trans fat – has been banned by authorities because of their particularly negative health effects. As a consequence of the ban, suppliers of baked goods have been forced to switch to alternatives, which are unfortunately more expensive. Using demand and supply analysis, how would you predict that these events would affect the price and quantity of baked goods sold in Tazenda in the short run (holding all else constant)? Demonstrate the impact on equilibrium price and quantity on the graph.

Answer 1