Question

Evaluate the following statements.  

A poor growing season has raised the price of peanuts for peanut butter manufacturers. As a result of the increase in the price of an input, the Supply of peanut butter is reduced which raises the price of peanut butter. The higher price of peanut butter leads to less demand for jelly as peanut butter and jelly are complements. The lower demand for jelly leads to lower prices for jelly which causes more consumers to buy jelly and to also buy more peanut butter to go with

Answer 1

Supply of Peanut Butter depends upon the prices of inputs. Costly inputs would raise the production cost and reduces the supply of peanut butter. Supply curve of the peanut butter will shift leftward showing a rise in prices of the good.

Now, Peanut Butter and Jelly are complementary goods. For such goods, a fall in the demand for one good leads to fall in the demand for the other good as well and vice-versa.

A Higher price of Peanut Butter makes it more expensive. As a result, the demand for Butter will decrease. Consumers will also start purchasing less quantity of Jelly as both the goods are consumed together. In the market for Jelly, the demand curve shifts to left. Both the price and quantity of Jelly would be lower.

Till now, both Peanut Butter and Jelly Markets are in disequilibrium. A lower price in the Jelly market would create excess supply of Jelly. This excess supply would create an upward pressure on Jelly' price. Price increases till the point where both demand and supply intersect.

In the Peanut Butter market, a higher derived demand for the good shifts the demand curve to right. The new demand curve will intersect the new supply curve at a higher price.