Chapter 3, Problem 1P

To determine

(a) Severe drought in the Midwest reducing the supply of cream.
(b) A new report revealing health benefits of chocolate.
(c) The discovery of cheaper synthetic vanilla flavoring.
(d) New technology lowering manufacturer’s cost.

Concept Introduction

Demand: The demand of a product or service in the market is derived by the willingness to purchase and ability of the consumers to pay for the purchase.

Supply: The supply of a product or service means making available a specific product or service to the consumers at a specific price.

Equilibrium Price: The equilibrium price is the market price at which the quantity demanded by the consumers equals the quantity supplied by the producers.

Explanation of Solution

(a) Severe drought in the Midwest reducing the supply of cream.

• In the given situation, a severe drought in the Midwest causes dairy farmers to reduce the milk producing cattle in their herds by a third.

• As a result of this, the cream supplied to the manufacturer of chocolate ice cream decreases, reducing the production of chocolate ice cream.

• This shall reduce the supply of chocolate ice cream and the demand shall exceed the supply.

• Thus, there will be a hike in the price of the chocolate ice cream due to which the demand will also fall.

Conclusion:

Thus, there will be a fall in supply followed by the hike in price and as a result reducing the demand.

(b) A new report revealing health benefits of chocolate.

• A new report that reveals that chocolate has significant health benefits, shall result in an increase in the quantity demanded of chocolate ice cream.

• This shall not affect the supply of the chocolate ice cream in the market.

• Thus, increase in demand at the same level of supply shall result in an increase in the price of chocolate ice cream.

Conclusion:

Thus, there will be an increase in the quantity demanded and price of chocolate ice cream, and the supply will remain constant.

(c) The discovery of cheaper synthetic vanilla flavoring.

• The discovery of cheaper synthetic vanilla flavoring results in lowering the price of vanilla ice cream.

• The chocolate icre cream and the vanilla ice cream are the substitute products. This implies that as the prices of vanilla ice cream decrease, the demand for it will increase and the demand for chocolate ice cream will decrease.

• This shall result in the surplus in the quantity supplied as the demand has lowered. Thus, the price of chocolate ice cream will fall.

Conclusion:

Thus, the demand and price of chocolate ice cream will decrease.

(d) New technology lowering manufacturer’s cost.

• The new technology for mixing and freezing ice cream shall reduce the manufacturer’s cost of producing chocolate ice cream.

• This shall result in an increase in the supply of chocolate ice cream because manufacturers will be willing to produce more.

• Thus, increased supply at the same demand level shall result in a fall in the price of chocolate ice cream.

Conclusion:

Thus, the supply will increase and the price will fall.