Question

Assume the price of tomatoes rise and consumers experience a boost in income. Use a supply and demand diagram to show what happens the equilibrium price and quantity of pizza. Explain.

Answer 1

Let p1 and q1 be the price and quantity of pizza respectively, D1 and S1 be the demand and supply curve and equilibrium at e1, now suppose, price of tomato rises, which is a factor input in production of pizza , raising its cost of production, the supply curve shifts leftwards to S2 ( supply falls) and as the consumers income rises, the demand curve shifts to D2 ( demand rises) . So now the equilibrium price increases to

P2 and quantity falls to Q2 and the equilibrium point is e2.