Question

b. Use supply and demand curves to illustrate how each of the following events
would affect the price of butter and the quantity of butter bought and sold: (1) an
increase in the price of margarine: (II) an increase in the price of milk; (iil) an increase in price of milk
(iii) a decrease in average income levels ​

Answer 1

Answer:

Explanation:a. An increase in the price of margarine.

Butter and margarine are substitute goods for most people. Therefore, an increase in the price of margarine will

cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D1 to D2

in Figure 2.2.a. This shift in demand causes the equilibrium price of butter to rise from P1 to P2 and the equilibrium

quantity to increase from Q1 to Q2.

b. An increase in the price of milk.

Milk is the main ingredient in butter. An increase in the price of milk increases the cost of producing butter, which

reduces the supply of butter. The supply curve for butter shifts from S1 to S2 in Figure 2.2.b, resulting in a higher

equilibrium price, P2 and a lower equilibrium quantity, Q2, for butter.

Note: Butter is in fact made from the fat that is skimmed from milk; thus butter and milk are joint products, and this

complicates things. If you take account of this relationship, your answer might change, but it depends on why the

price of milk increased. If the increase were caused by an increase in the demand for milk, the equilibrium quantity

of milk supplied would increase. With more milk being produced, there would be more milk fat available to make

butter, and the price of milk fat would fall. This would shift the supply curve for butter to the right, resulting in a

drop in the price of butter and an increase in the quantity of butter supplied.

c. A decrease in average income levels.

Assuming that butter is a normal good, a decrease in average income will cause the demand curve for butter to

decrease (i.e., shift from D1 to D2). This will result in a decline in the equilibrium price from P1 to P2, and a decline

in the equilibrium quantity from Q1 to Q2.