Question

Soda drinks (“pop) are fairly popular with Saskatchewan residents. People like to drink it with meals, as a refreshing drink on a hot day, as mix with alcoholic beverages, etc. The following describes recent changes in the Saskatchewan soda market:

• Consumption decreased from 30 million liters per month to 27 million liters per month; and
• The average price of soda pop increased from $2.00 per liter to $3.00 per liter.

In a recent report, the Canadian Beverage Association (CBA) attributes the following reasons for the changes in prices and quantities:

• The recent COVID-19 pandemic has caused people to spend more time at home. People are binge-watching TV series, watching movies, reading books, surfing the web/social media, etc. to entertain themselves. The CBA suggested that people like to drink soda drinks while doing these more sedentary activities. People liked it so much they began to hoard soda pop, particularly in less popular brands; and
• Prices of key inputs into the production of soda drinks have risen in most parts of the world due to COVID-19. There are shortages of key inputs like aluminum, plastic and carbon dioxide causing prices of these inputs to increase substantially. The impact on input prices has also impacted soda drink manufacturers operating in the Saskatchewan market.

a) With the aid of a graph, explain what happened to the demand and supply in the Saskatchewan soda drink market based on the information provided by the CBA. Please ensure to incorporate the data cited earlier into your explanation as well as the labeling and drawing of your graph when explaining the overall effect of the supply and demand shocks on price and quantity. Hint: you don’thave to draw the graph to scale.

b) With the supply & demand shocks that occurred, are the effects on price and quantity ambiguous or unambiguous relative to the initial equilibrium in part a) (i.e. a price increase and quantity decrease)? Put another way, could there be a different outcome for the new equilibrium price (i.e. stay the same or decrease) or equilibrium quantity (i.e. increase or stay the same) compared to what occurred? Please carefully explain your answer and note that no graph is required.

c) What has likely happened to consumer and producer surplus as a result of the changes to the equilibrium price and quantity? That is, did consumer and producer surplus increase, decrease or stay the same as a result of the changes in part a)? Can the changes to consumer and producer surplus be known with certainty with the information provided?

d) What impact will the changes in Saskatchewan’s soda drink market have on the Saskatchewan potato chip market. That is, how would the changes in the equilibrium price and quantity of soda drinks affect the potato chip market? You must provide a graph to support your explanation. Hint: think substitutes and complements!

Answer 1