15. Another supply and demand puzzle The market price of pizzas in a college tow

Question

15. Another supply and demand puzzle The market price of pizzas in a college town decreased recently, and the students in an economics class are debating the cause of the price decrease Some students suggest that the price decreased because several new pizza parlors have recently opened in the area. Other students attribute the decrease in the price of pizzas to a recent decrease in the price of hamburgers at local burger joints. Everyone agrees that the decrease in the price of hamburgers was caused by a recent decrease in the price of ground beef, which is not generally used in making pizzas. Assume that pizza parlors and burger joints are entirely separate entities-that is, there aren't places that serve both pizzas and hamburgers. The first group of students thinks the decrease in the price of pizzas is due to the fact that several new pizza parlors have recently opened in the area On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the decrease in the price of pizzas. Supply Demand Supply QUANTITY (Pizzas)

Explanation / Answer

The first group of students thinks the decrease in price of pizzas is due to the fact that several new pizza parlors have recently opened in the area.

So in the graph,the slope of the supply line decreases and it becomes more flat. However the demand line doesn't necessarily show any change thus shifting the point of intersection of supply and demand lines towards right while increasing the equilibrium quantity of pizzas at a lower price per pizza.

The second group attributes the decrease in price of pizzas to the decrease in price of hamburger at local burger joints.

So in the graph,the slope of the demand line decreases and it becomes more flat. However the supply line doesn't necessarily show any change thus shifting the point of intersection of supply and demand lines towards left while decreasing the equilibrium quantity of pizzas at a lower price per pizza.

Though the price per pizza decreases in both the cases, a supply shift to the right increases the equilibrium quantity of pizzas being sold ,
while, a demand shift to the left decreases the equilibrium quantity of pizzas being sold .

In the tug of war between the two factors,a net shift in equilibrium quantity of pizzas is in the direction of the dominant cause i.e;

If the equilibrium quantity of pizzas decreases,then the demand shift in the market for pizzas must have been larger than the supply shift and vice versa.

Therefore the first option is the right answer.

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