1. On separate demand and supply diagrams for bread, sketch the effects of the following: (a)...

1. On separate demand and supply diagrams for bread, sketch the effects of the following: (a) a rise in the price of wheat; (b) a rise in the price of butter and margarine; (c) a rise in the price of rice, pasta and potatoes. In each case, state your assumptions.

(a) The supply curve will shift to the left: the price of bread will rise and the quantity sold will fall. Wheat is used to make flour, which is used to make bread. If wheat goes up in price, this will increase the cost of producing bread and hence shift the supply curve (upward) to the left.

(b) The demand curve will shift to the left: the price of bread will fall and the quantity sold will fall. Butter and margarine are complements for bread. If they go up in price, less ‘bread-and-butter’ will be consumed.

(c) The demand curve will shift to the right: the price of bread will rise and the quantity sold will rise. Rice, pasta and potatoes are substitutes for bread. If they go up in price, less of them will be purchased and more bread will be purchased instead.

Solutions

Expert Solution

(a) When the price of wheat rises:

The graph:

When there is an incease in the price of wheat, an input in the process of bread making, the profit of producers declines. So, the quantity supplied decreases. This causes a shift in the supply curve to the left, from S to S1, indicating a decrease in supply. As a result, price increases and quantity of bread supplied decreases.

(b) When the price of butter and margarine increases:

The graph:

When the price of butter and margarine, a complement of bread, increases, the demand for bread decreases. Demand curve shifts to the left, from D to D1, indicating a decrease in demand. As a esult, price decreases from P to P1, and quantity also decreases - from Q to Q1.

The graph:

When the price of rice, pasta and potatoes, substitutes of bread, increases, consumers shift their preferences to bread. As a result, the demand for bread increases, shifting the demand curve to the right, from D to D1. This indicates an increase in both the price (from P to P1) and quantity (from Q to Q1). Thus both price and quantity of bread increase.

Rahul Sunny answered 1 year ago

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