Illustrate the supply and demand graph. Assume this graph is the market for pizza. On the same graph, illustrate what you anticipate would happen if the price of flour increased.
Answer.) The Following graph illustrate what is happening in the market for pizza. Note that D and S are original Demand and Supply curves respectively. Which means that P is equilibrium price and Q is equilibrium quantity. Now, if the price of flour increases, then, being an essential input in pizza making process, Increase in the price of flour will increase overall cost of production of pizza.
This will result in shift in supply curve leftward from S to S1. Therefore, Equilibrium price of pizza increases from P to P1 and equilibrium quantity of pizza decreases from Q to Q1.
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