Answer to Question #310191 in Microeconomics for joseph

Question

Consider the market for ice cream in Paris. Using appropriate diagrams, explain how each of the following events will impact the equilibrium price and quantity of ice cream.

a. The population of Paris falls.

b. The cost of milk (an input in production) increases.

c. Both the population of Paris falls and the cost of milk increases at the same time.

Answer 1

a) The population of Paris falls.

A decline in population causes a decrease in demand. This makes the equilibrium price fall whereas there is a decrease in the quantity supplied. Thus, there is a leftward shift in the demand curve.

b)The cost of milk (an input in production) increases

An increase in the cost of production for milk results in decreased supply of ice cream. This causes the equilibrium price to rise and the quantity demanded will decrease. Hence, the supply curve shifts to the left.

c)Both the population of Paris increase and the cost of milk increases at the same time.

The decrease in demand for ice cream is proportionately less than the decrease in the supply for ice cream, therefore the shift of the demand curve to the left from D to Da ¹ is proportionately less than a shift of the supply curve to the left from S to S¹. Thus the new equilibrium is determined at E¹, equilibrium price rises from OP to OP¹ whereas equilibrium quantity falls from OQ to OQ¹.