Assume that the pizza market is initially in equilibrium. Suppose that there is

Question

Assume that the pizza market is initially in equilibrium. Suppose that there is a rise in a price of a hamburger. For consumers, pizza and hamburgers are substitutes in consumption (it means that in consumption people tend to substitute a cheaper good for a more expensive good). Use supply and demand analysis to determine what will happen in the pizza market. In other words, determine (a) if there will be any shift in the demand for pizza; (b) if there will be any shift in the supply of pizza; (c) if the equilibrium price of pizza will increase, decrease, or stay the same; (d) if the equilibrium quantity of pizza will increase, decrease, or stay the same. TIPS : In questions this you should consider a specific event(s) described in each problem and assume that all other factors remain unchanged. For example, if a problem says that people

Explanation / Answer

follow this information to get answer When the market price of a good or service rises above equilibrium on its own, the number of buyers exhibiting demand for it is reduced. The only thing left for the maker of such a good or service to do is to drop the price to restore the level of demand necessary to make an optimal profit. This sounds contrary to simple arithmetic, but the fact is that the equilibrium is the price at which consumers get the best deal and suppliers earn the most profit. The effect of price controls is a common example of when a price is held artificially above equilibrium price. Equilibrium is established in a free market where the quantity of a good or service supplied is equal to the quantity demanded. So when government steps in and imposes a price floor on a good or service (such as milk or even labor i.e. minimum wage), everything is fine unless the forces of supply and demand cause the equilibrium to fall beneath that price floor. In the case of labor, minimum wage can cause a labor surplus (commonly and fallaciously referred to as a job shortage). Essentially the price of labor is held artificially high so employers are forced to seek alternatives such as hiring fewer people to do the same job. If the price of milk is set above equilibrium by legislation (perhaps as an earmark to support small agriculture) then the natural effect is for there to be a surplus. Long story short, a lot of milk spoils on the shelves at the grocery store.

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