Using the concepts covered this week, discuss the following:
- Distinguish between a change in demand vs. a change in quantity demanded: What factors besides price could cause a shift in the overall demand curve for cupcakes? (e.g., income levels, popularity of cupcakes)
- Explain how this scenario might affect the supply of cupcakes: How might existing bakeries react? Would there be incentive for new entrants into the cupcake market? How would these changes be reflected in the supply curve?
- Market Equilibrium: At the new equilibrium price point, why will the quantity demanded equal the quantity supplied?
- Government Intervention: Suppose the local government, concerned about affordability, sets a price ceiling below the equilibrium price. Using graphs, illustrate the effects of this price ceiling on the market for cupcakes.
- Who benefits and who suffers from the price ceiling?
- Are there any potential unintended consequences?
Explanation:
This question tests your understanding of several key concepts from the chapter objectives:
- Demand vs. Quantity Demanded: A change in demand refers to a shift in the entire demand curve, caused by factors other than price. A change in quantity demanded refers to a movement along the existing demand curve due to a price change.
- Supply and its determinants: The influx of new bakeries would increase the supply of cupcakes, shifting the supply curve to the right.
- Market Equilibrium: At the equilibrium price, both buyers and sellers are satisfied. The quantity demanded by buyers exactly matches the quantity supplied by sellers.
- Price Ceilings: A price ceiling set below equilibrium creates a shortage because the quantity demanded exceeds the quantity supplied at that price. Consumers might benefit from lower prices, but producers would be discouraged from supplying cupcakes, potentially leading to shortages.