Question

For each of the following scenarios, draw the impact on the market for bagels. Label your axes and curves in each supply and demand diagram. Summarize what happens to supply, demand, price, and quantity. Does each increase, decrease, stay the same, or cannot be determined? Use arrows and/or number your curves to indicate a shift where appropriate. Consider each part separately, for example in part b, assume part a has never happened and the economy is back in its original equilibrium. a. The price of bagels increases. b. The price of cream cheese increases. c. The price of flour increases and at the same time, consumers’ incomes increase. d. The price of fancy toast decreases and at the same time, a chain of bagel stores closes.

Answer 1

c) Increase in price of flour decreases production of bagels because cost of production increases. Increase in production cost decreases supply of bagels in the market and shifts supply curve leftwards. Increase in consumer's income increases demand of bagels and shift demand curve rightwards.

When increase in demand is equal to decrease in supply then equilibrium price increases while quantity remains same.

d) When chain of bagel stores closes then supply of bagel decreases in the market. As supply of bagel decreases due to change in factors other than price of bagel, supply curve shifts leftwards.

Fancy toast and bagels are substitute goods which means they are consumed in place of each other. When price of fancy toast falls then demand of bagels increases which shifts demand curve rightwards.

If decrease in supply is less than increase in demand, equilibrium price and quantity both increases.

When decrease in supply is equal to increase in demand then equilibrium price rises while quantity remains same.