Answer to Question #163416 in Macroeconomics for phong do

Question

1.      Consider the market for rye bread. Using normal supply and demand curves, draw a properly labelled graph and show the equilibrium price and quantity exchanged in the rye bread market. Now use your supply and demand analysis to graphically illustrate each of the following in the rye bread market (you can either draw a separate graph for each of these items or you can use one well-labelled master graph; This question is worth 5 points):

a.     The price of wheat bread (a substitute for rye bread) just fell by 50%. What happens in the market for rye bread?

b.     Flour (which is an essential ingredient in rye bread production) has just doubled in price. What happens in the market for rye bread?

c.     The US has decided to start selling rye bread to Cuba. What happens in the market for rye bread?

d.     A new technology has just emerged that allows manufacturers to double their daily output of rye bread. What happens in the rye bread market?

Answer 1

1.supply and demand graph

P_E is the equilibrium price, and Q_E is the equilibrium volume.

a. buyers will choose wheat bread, which is cheaper, so when the substitute becomes cheaper, the demand for rye bread falls and vice versa. on the first chart, the price of wheat bread falls,on the second, the demand for rye bread falls

b. production costs are rising, production is shrinking, and prices are falling

c. the supply line shifts to the right