The market price of pizza in College Town decreased recently. Some students in an economics class suggest that the price fell because several new pizza parlors opened for business in the area. Other students attributed the fall in the price for pizza more to the fall in the price of hamburgers at local burger joints. Everyone agreed that the fall in the price of hamburgers was caused by a fall in the price of ground beef. Using your analysis of the explanations offered by the two groups of students, how would you identify which explanation is the dominant or main cause of the decrease in the price of pizza? A. If the equilibrium quantity of pizza increased, then the dominant cause must have been the supply shift in the market for pizza. B. It depends on whether the demand curve or supply curve changed first. C. If the equilibrium quantity of pizza increased, then the dominant cause must have been the demand shift in the market for pizza caused by the decrease in the price of hamburgers. D. If the equilibrium quantity of pizza decreased, then the dominant cause must have been the supply shift in the market for pizza.
Strike D, at quantity decrease price should have gone up. On a cause by cause basis, both A and C would be true, depending on what you believe caused the decrease in the price of pizza (A for more suppliers on the market, the first group of students, C for the decrease in the price of a substitute - hamburgers, the second group of students). As such, I think the most appropriate answer would be B. The decrease in the price of pizza is determined by what changed first: the demand (driven by decreased prices in substitutes) or the supply (driven by the increased number of suppliers).
I think I was wrong. The only clear cut seems to be A. If the dominant is the supply shift (down to the right, since more parlors are in the market, and you cannot control their supply, or have them in a Prisoner’s Dilemma to deliver less), then the quantity increases. The price definitely decreases. Of course, the demand could shift down to the left enough to bring the quantity down (decrease quantity, at point D), but because of the shift in demand, not because of the shift in supply. So D is out. At point C, the quantity increased because of more suppliers, not because the reduced demand ( demand for pizza decreases - shifts lower to the left because of lower substitute prices). So C is out. At point B, both supply and demand shifts could bring prices down, which one’s effect is the strongest does not depend on which moves first. The quantity delivered however, depends on how far from the original position is demand moving. A graph of supply and demand and moves of the curves helps a lot.
I think it is B. I played with some S/D curves to test it out. Given supply increases, equilibrium price is lower on the demand curve. Given substitute prices decrease, this causes a shift in the demand curve down the supply line thus lowering price. So, it really depends
Correct. However, B explains nothing, since both the shift of supply and the shift of demand decreases prices. But can you determine with certainty that the first one that moves is the main cause of prices decrease?
My guess would be A…Do you know what the correct answer is?
I agree with A, I think the increase of pizza suppliers is more likely to decrease the price of pizza because of the increased competition. We can’t conclude that the hamburger is a perfect substitue. Also, if the hamburger was a perfect subsitute, then more pizza suppliers would not enter the market because of decreasing profit margins. We don’t know if the pizza shops opened before the price of hamburgers dropped, but we do know that effect of competition is to bring down prices. I think more information is needed to be certain, but it is more likely for competition to bring down prices than it is for hamburgers to be a close substitute for pizza. It seems like there should always be some unique demand for pizza versus other fast foods.
I think A too. The other answers just dont make sense. B is uncertian, when you have both demand and supply curves shifting, you cant draw a new price conclusion, C impies the the demand would shift backward, and D just doesnt make sense giving a decrease in supply as a viable outcome.
A was correct.
D) cannot occur because if the eqm quantity of pizzas decreased, that would imply that supply shifts to the right. This would cause a decrease in price, and answer D outlines an increase in price. C) cannot occur because if eqm quantity of pizzas increased, demand for pizza’s would shift to the right. This would cause an increase in price. B) stands for Bull dung and is useless. A) makes graphical and intuitive sense. If Demand moved it is going to either: 1) increase p and q or 2) decrease p and quantity. Neither of these scenarios are applicible. My vote is A.
I am also convinced with A, because definitely from the explanation, there is increase in quantity supplied by several new pizza parlors.
C and D are surely not correct as all of you have already pointed it out. I just want to assign a reason why B is not correct. B is not correct, because it is assigning the cause based on what happened FIRST. Lowerd new equilibrium Price is IMMATERIAL of whether Demand shifted down FIRST or whether Supply shifted to right FIRST. When a new equilibrium is established, it does not matter as to what happened FIRST.