Question

Using supply and demand theory, explain the likely impacts on market price and output levels given the following scenario. Ketchup is a complement (as well as a condiment) for hot dogs. Suppose the price of hot dogs rises:
a.   How will the ketchup market be impacted?
b.   Given these impacts, how will the tomato market be impacted?
c. And the market for tomato juice?
d. The market for orange juice?

Answer 1

Ans) 1) Tomato ketchup and hot dogs are complementary goods. And we know that when price of complementary good rises, demand for good in question decreases. Therefore, demand for ketchup will decrease and demand curve of ketchup will shift to the left. As a result, both price and quantity of ketchup will decrease.

2) Now since the demand for ketchup declined, factory owners which produce ketchup, will decrease the demand for tomatoes. And hence demand curve of tomatoes will shift to the left. And both price and quantity of tomatoes will decrease.

3) Now when price of tomatoes decreases, the cost of input for firms which produce tomato juice decreases. And therefore, supply of tomato juice will increase. Supply curve of tomato juice will shift to the right. And price will decrease while quantity will increase.

4) We know that consumer prefers cheaper alternative. And tomato juice and orange juice are substitutes. So when price of tomato juice will decreases, people will substitute tomato juice for orange juice. Therefore, demand for orange juice will decrease and demand curve of orange juice will shift to the left. Both price and quantity of orange juice will decrease.