Answer to Question #282412 in Microeconomics for Lindaa

Question

It has been reported that the world demand for chocolate is increasing at a time when the supply of cocoa beans, the raw ingredient required to produce chocolate, is not as large as expected. Explain, with the help of a diagram, the likely effects of these changes on the world market for chocolate products. 

Answer 1

Increased demand of Chocolate shifts the market demand curve to the right (D₁ to D₂). As supply is relatively inelastic, due to the inelastic supply of the ingredients required in production of the chocolate, price increases to P₂ from P₁ but with a smaller increase in the quantity traded, to Q₂ from Q₁. The initial equilibrium is at P1Q1 and the new equilibrium is P2Q2. The general effect is an increase in price level of cholate in the world market.

The same can be illustrated in the diagram below;