Question

1. Now assume that the citizens of the town become informed about the cruel and inhumane process of raising and killing cows for meat. As a result, their demand for cow meat falls dramatically.  Assume that people decide they would rather eat fresh caught fish as their main protein.
   1. What will happen in the market for cow meat? Explain and graph the initial equilibrium, new equilibrium and describe the change in producer and consumer surplus.

What will happen in the market for fresh caught fish? Explain and graph the initial equilibrium, new equilibrium and describe the change in producer and consumer surplus.

Answer 1

a. As the demand for cow meat falls, there will be a leftward shift in the demand curve in the market for cow meat. In figure 1, it is shown that, initial equilibrium is t point E₁ , where initial demand curve for cow meat D₁ and supply curve S meats each other. As the preference of people shifts for another food, there is only a change in the demand curve. The supply curve remains unaltered as supply of meat in the market has not been changed. The new equilibrium occurs at point E2, where new demand curve D₂ cuts the supply curve. As a result, price and quantity sold in the cow meat market, both drop. Initially consumer surplus was triangle AP*E₁ and the producer surplus was triangle P*E₁C. After the shift in demand curve, both consumer and producer surplus falls. New CS is triangle BE₂P₂ and PS is P₂E₂C.

Figure 1

b. The opposite happens in the fresh fish market. Suppose initial equilibrium occurs at E1 in figure 2. As the demand for fresh fish rises, demand curve shifts to the right to D2. However, there is no change in the supply curve as supply of fish is same as before. Due to increase in demand, price of fresh fish and quantity sold both rise. Consumer surplus and producer surplus both expands in this event. CS increases from ΔGE₁P₁ to ΔFE₂P₂ and PS increases from ΔP₁E₁H to ΔP₂E₂H .

Figure 2