Question

3. The following pertains to the market for pizza.

a. Graph the market for pizza using a supply and demand diagram. Label all

important points.

b. Now assume that a disease has destroyed a large part of this year’s wheat crop.

Graph the effects on a new supply and demand diagram. Specifically show how this changes the market from the initial equilibrium in part (a). Label all important points.

c. Now assume, instead of what happened in part (b), that the price of hamburgers falls. Graph the effects on a new supply and demand diagram. Specifically show how this changes the market from the initial equilibrium in part (a). Label all important points.

Answer 1

3. (a) The graph is as below.

As can be seen, the equilibrium E is where the supply is equal to the demand, at equilibrium quantity Q1 and equilibrium price P1.

(b) The graph is as below.

Wheat is an input in making Pizzas, and reduction in production of wheat would mean that the supply of Pizzas would be reduced. As a result, the supply curve shifts left, meaning that for the same price, less can be produced than before. The new equilibrium is at E', which has equilibrium quantity Q2 and equilibrium price P2. As can be seen, the equilibrium quantity has reduced while the equilibrium price is increased due to reduction in wheat production.

(c) The graph is as below.

Hamburger is a substitute of Pizza, and decrease in Hamburger price would mean the increase in Hamburger quantity, and increase in Hamburger quantity would mean that Pizza's demand would reduce. The demand for Pizza shifts left, meaning that at the same price, less quantity of Pizza is demanded. At the new equilibrium E'', the equilibrium quantity is reduced to Q3 (not necessarily equal to Q2, but may be) while the equilibrium price is also reduced to P3.