Business Economics: Equilibrium Price and Quantity, Effects of Rise in Oil Prices, Monopolistic Competition, Opportunity Cost, Constant, Increasing and Decreasing Cost Industry

BUSINESS ECONOMICS 1
BUSINESS ECONOMICS
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BUSINESS ECONOMICS 2
Question 7
a. A rise in the price of margarine does not shift the equilibrium price and quantity. When
the price of margarine rises above the equilibrium price, say from Po (equilibrium price)
to P1, the quantity of margarine supplied is higher than the quantity of margarine
demanded and hence rises from Qo (equilibrium quantity) to Q2 . The quantity demanded
decreases from Qo to Q1. This creates excess supply of margarine which is referred to as a
surplus. Excess margarine which is not sold will be available in the market. This means
that suppliers will have to lower their price back to equilibrium point (Po , Qo)in order to
sell all the margarine supplied and hence the equilibrium price and quantity will not
change. This is illustrated in the diagram below:

BUSINESS ECONOMICS 3
b. The rise in demand for yoghurt does not affect the equilibrium price and quantity for
margarine. The market equilibrium for margarine (Po , Qo) remains unchanged. This is
due to the fact that yoghurt and margarine are not close substitutes and hence cannot be
used for the same purpose. The deviation in demand for either the good does not affect
the demand and supply for the other and hence the equilibrium point remains unchanged
at point (Po , Qo). this is illustrated in the diagram below:

BUSINESS ECONOMICS 4
c. An increase in the price of bread lowers the demand of margarine. Bread and margarine
are compliments. An increase in the price of bread lowers the demand of bread and this
means that on the other hand the demand and supply of margarine also decrease. The
demand curve of margarine shifts to the left from D1 to D2 while the supply curve shifts
from S1 to S2 downwards. The equilibrium price and quantity shifts downwards from Po
to P1 and from Qo to Q1 respectively. This means the equilibrium point shifts from point
(Po , Qo) to point (P1 , Q1 ). This is illustrated in the figure below:
d. As discussed above in bread and margarine are complements meaning that they are
consumed together. When the demand for bread increases, the demand for margarine also
increases. The supply of margarine on the other hand also increases. This means that the
demand curve for margarine shifts rightwards from D1 to D2. The supply curve shifts
upwards from S1 to S2. The equilibrium price and quantity points moves upwards from