Question

1.Suppose we are analyzing the market for ice cream. Explain clearly and illustrate graphically the impacts of each of following would have on the demand and/or supply a Summer starts and the weather becomes hotter. b. A more efficient method of milking cows is introduced . c. Producers expect the price of ice cream to increase next month dThe price of popsicles falls. eBoth a and b occurs simultaneously . f Both c and d occurs simultaneously .

Answer 1

The impact of all these changes can be explained with the help of diagrams. Following diagram shows the initial equilibrium in the icecream market. DD is the demand curve which represents the negative relationship between quantity demanded and price of ice-creams. SS is the Supply curve of ice-creams which represents the positive relationship between quantity supplied and price of ice-creams. Equlibrium price in the market is P and equlibrium quantity in the market is Q determined by the intersection of DD and SS at point E.

a) Summer starts and weather becomes hotter

When summer starts and weather becomes hotter people would like consume more frozen food, especially ice-creams . As a result, demand for ice-creams will increase. Demand curve for the ice-cream shifts to right from DD to D1 D1.

Intersection of D1D1 with SS leads at E1 to a rise in equilibrium price from P to P1 and quantity from Q to Q1..

b) More efficient method of milking cows is introduced.

New method will improve the production of milk . Milk is the most important ingredient of ice-cream. Thus Supply of ice-creams will increase. As a result, Supply curve of ice-creams shift to right from SS to S1S1.

Intersection of S1S1 with DD at E1 leads to a fall in equilibrium price from P to P1 and rise in equlibrium quantity from Q to Q1.

c) producers expecte the price of Increase in ice-creams in next month.

When sellers expect a price rise, they will reduce the quantity supplied at the current price expecting to produce more in the next month in order to earn more revenue. As a result, Supply curve shifts to left from SS to S1S1

Intersection of S1S1 with DD at E1 leads to a rise in equlibrium price from P to P1 and fall in equilibrium quantity from Q to Q1.

d) price of popsicle falls

Popsicle is a substitute for ice-creams . When price of popsicle falls, compared to ice ice-creams, people will shift their preferences from ice-cream to popsicle. As a result, demand for ice-cream declines. Demand curve shifts to left from DD to D1 D1.

Intersection of new demand curve D1 D1 with Supply curve SS at E1 leads to a decline in equlibrium price from P to P1 and equlibrium quantity from Q to Q1.

e)a and b occurs simultaneously.

When a and b occurs simultaneously, demandcurve shifts to right from DD to D1 D1 due to the change in weather and Supply curve shifts to right from SS to S1S1 more milk being available. However Increase in quantity demanded will be higher than the Increase in quantity supplied.

Intersection of D1D1 with S1 S1 at E1 leads to a decline in equlibrium price from P to P1 and equilibrium quantity from Q to Q1.

f) c and d occurs simultaneously.

When c and d occurs simultaneously, demand curve shifts to left from DD to D1 D1 due to the fall in price of popsicle and Supply curve shifts to left from SS to S1S1 due to the expectation about a price rise. However, fall in demand must be greater than the fall in Supply as the period associated with price expectation is short.

Intersection of D1D1 with S1 S1 leads to a fall in equilibrium price from P to P1 and equlibrium quantity from Q to Q1