Impact of Butter Shortage on Related Markets

This assignment examines the ripple effects of a butter supply shortage on both substitute and complementary markets. It analyzes how rising butter prices impact the demand for margarine as a substitute, leading to market expansion. Conversely, it explores how the increased cost of butter reduces the supply of baked goods, resulting in higher prices and lower quantities available. The analysis utilizes supply and demand curves to illustrate these changes.

Running Head: ECONOMICS
Economics
Name of the Student
Name of the University
Author note

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Table of Contents
Answer 1..........................................................................................................................................2
Answer 2..........................................................................................................................................4
Answer 3..........................................................................................................................................4
References........................................................................................................................................7

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Answer 1
In the competitive market price and quantity is determined from the prevailing supply
and demand situation. Supply represents willingness of producer to supply a good at various
prices. Demand on the other hand measures the desire of buyers to buy the good supported by
their purchasing power. The equilibrium in the market is obtained where supply and demand
matches (Arrow 2015). A nationwide shortage of butter is realized. There are both demand and
supply side factors causing the shortage.
Figure 1: Decline in supply and supply shortage
(Source: as created by Author)
In figure 1, the demand curve in the butter market is DD and the supply curve is given as
SS. E is the point of equilibrium. Price in the market is P1and corresponding quantity in the
market is Q1. One factor causing shortage in butter is increasing preference of the consumers

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towards full cream milk rather than skim. When people demanded full cream milk, then available
milk for butter. This reduces butter production. The supply of a commodity largely depend on
the supply of relevant inputs. Milk is one important ingredient in butter production. There is a
suddendrop in the production of milk. The shortage of milk supply reduces demand for butter.
The reduction in supply causes a leftward shift of the supply curve (Moulin 2014). The supply
curve shifts fromSS to S1S1. The new equilibrium is obtained at the intersection of new supply
curve and earlier demand curve. E1is the new equilibrium point where price increased from P1 to
P2 while quantity reduces from Q1 to Q2.
Figure 2: Increase in demand and supply shortage
(Source: as created by Author)

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Another factor contributing to shortage of supply is the rising demand for butter. There is
a recorded increase in preference for butter over margarine. The increase in demand shifts the
demand curve to the right from DD to D1D1. With change in the demand condition, the
equilibrium point moves from E1 to E2(Krugmanet al. 2016). At the new equilibrium E2, price
increases from P* to P1and equilibrium quantity in the market should be increased to Q1.
Answer 2
a) Price elasticity of demand signifies the responsiveness of the quantity demanded of
products with respect to its price change (Bauer 2014). If the price elasticity of demand
for a particular product is less than one, the demand is said to be inelastic. This means
that the demand for the product does not vary owing to change in its price. If the price
elasticity of demand is greater than one, the demand is termed as elastic. There are
several factors that determine price elasticity of demand, which includes-
 Availability of substitute products- If a particular product has close substitute, the
demand tends to become elastic (Baumol and Blinder 2015). However, if the price of
this product rises, the consumers will shift to purchase its substitute and hence the
demand for this product decreases.
 Proportion of income spent by consumers- The income level of the consumers is
one of the vital factors that influences elasticity of demand. The larger the amount
spent by consumer on a particular commodity, greater will be its elasticity of demand.
 Price range- At high or low price range, the demand for the product tends to be
inelastic. The demand for the low priced products is inelastic as it less amount of
income is spent on it.

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Quantity of
Butter
Price of Butter
P
P1
Q Q
1
 Number of utilization of a specific product- Greater the number of utilization of
goods, higher is its price elasticity of demand.
The case study reflects that shortage of butter leads to rise in prices of baked products
owing to increase in price of butter. This shortage occurred owing to availability of
substitute products such as margarine that is being used in baked goods. As butter and
margarine are close substitute of each other, the demand for butter is said to be elastic.
This is because rise in price of butter increases the demand for margarine since buyers
switch to purchase this commodity.
Figure 1: Elastic demand for butter
Source: ( As created by author)
b) Total expenditure that the consumers make while buying the product mainly depends on
the price elasticity of demand. Changes in total consumer expenditure mainly depend on

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Quantity
Price
D
D
P
P1
Q Q1
the changes in both price as well as quantity. In case of elastic demand, change in price
of products is less than the change in its quantity. The fall in total consumer expenditure
is induced by less price is mainly overwhelmed by rise in total spending induced by large
quantity. Hence, the total consumer expenditure increases with decline in this product
price (Rios, McConnell and Brue 2013). On the contrary, for inelastic demand, relative
price change of a particular product is larger than relative change in its quantity. The rise
in total spending is overwhelmed by fall in total spending that is induced by low prices.
Hence, total expenditure declines with decrease in its price.
If the market demand for the baked products is price inelastic, then the total
consumer expenditure will decrease in this market stem mining from shortage of butter
(Mankiw 2014). Therefore, it can be assumed that the total revenue obtained by the
seller will be low. The figure shown below reflects that inelastic demand is steeper than
original demand curve.

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Figure 1: Inelastic demand for baked products
Source: ( As created by author)
Answer 3
Change in demand and supply in the market of one good affects the market of the related
goods. The related goods can be either substitutes or complementary. The impact of change in
one market affects the market of substitute and complementary good differently. For
complementary products, the direction of change in the two markets scenario is same. However,
for substitute products, contraction in one market means expansion of the other (Mahanty2014).
In case of butter, the complementary markets for butter are cakes, pies, biscuits and products
baked with butter. Margarine is the substitute product of butter. The effect of a supply shortage
in the butter market on both substitute and complementary goods are analyzed.
Figure 3: Market for baked goods
(Source: as created by Author)
The markets for baked goods like cake, pie, biscuit and others now face a high price of
butter because of a shortage of butter. With rising price, butter now becomes less affordable for

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producers in these markets. Suppose, DD and SS denotes the demand and supply of baked
products that use butter. Initially, price and quantity in the market are P* and Q* respectively.
Now with a butter shortage and high price of butter, producers now have less butter and this
causes a reduction in supply of baked goods (Baumol and Blinder 2015). The supply curve shifts
left from SS to S1S1. The new equilibrium is at e1. Price for baked goods increases to P1 with a
lower quantity available in the market.
Figure 4: Market for margarine
(Source: as created by Author)
The price of butter is now sky rising following a severe shortage of butter. Both
consumers and producers of baked goods now suffered from a high butter price. Therefore,
people are substituting butter by margarine. Some bakers are now using margarine for baking
goods. As a result, the demand for margarine increases shifting the demand curve to the right
(Frank 2014). The demand curve of margarine shifts from D1D1 to D2D2. The increased demand
leads to an expansion of margarine market. Both price and quantity increases in the new
equilibrium point e2.

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References
Arrow, K., 2015. Microeconomics and operations research: Their interactions and
differences. Information Systems Frontiers, 17(1), pp.3-9.
Bauer, M.J.R., 2014. Principles of microeconomics.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage
Learning.
Frank, R., 2014. Microeconomics and behavior. McGraw-Hill Higher Education.
Krugman, P., Wells, R., Au, I. and Parkinson, J., 2015. Microeconomics: Canadian Edition.
Macmillan Higher Education.
Mahanty, A.K., 2014. Intermediate microeconomics with applications. Academic Press.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Moulin, H., 2014. Cooperative microeconomics: a game-theoretic introduction. Princeton
University Press.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and
policies. McGraw-Hill.