What will happen to the equilibrium price and quantity of bu

What will happen to the equilibrium price and quantity of butter in each of the following cases?

Illustrate with a diagram and explain whether demand and supply (or both) have shifted and in which direction? (In each case, assume ceteris paribus)

a. A rise in the price of margarine;

b .A rise in the price of yoghurt;

c .A rise in the price of bread;

d. An increase in the demand for bread;

e. An expected rise in the price of butter in the near future;

f. An tax on butter production;

g. An invention of a new but expensive process, for removing all cholesterol from butter plus the passing of a law which states that all butter producer must use this process.

Solution

(a)   With the increase in price of margarine, Price as well as quantity of Butter increases or rises. As a result of which dd(demand curve) shifts to the right as butter and margarine are substitutes to each other.

(b)   With the increase in the price of Yoghurt, price of the butter falls and hence quantity of Butter increases. As a result of which supply curve shifts to the right as butter and yoghurt are in joint supply.

(c)   With the increase in the price of Bread, price as well as the quantity of Butter falls or decreases. As a result of demand curve shifts to the left as bread and butter are complementary goods.

(d) With the increase in the demand of Bread, price as well as the quantity of increases. As a result of which demand curve of Butter shifts to the right as bread and butter are complementary goods.

(e)   With an expected rise in the price of butter in the near future, there will be an increase in the price, quantity will rise or fall depending on relative sizes of the shifts in demand and supply (demand curve will tend to shift to the right as people will prefer to buy now before the increase in the price; supply curve will shift to the left as producers will look forward to hold back stocks until the price does rise).

(f)   with tax being applicable on butter production, Price of the butter will rise, abd the quantity of butter falls. As a result of which supply curve will shift to the left.

(g)   With an invention of a new but expensive process, for removing all cholesterol from butter plus the passing of a law which states that all butter producer must use this process, Price of the butter will increase but the quantity of Butter increases or decreases as per the relative size of the shifts in demand and supply (demand curve will shift to the right as health-conscious people start buying more quantity of butter; supply curve will shift to the left as a result of the increased cost of production.