Question

4) A survey indicated that chocolate is the most popular flavor of ice cream in America.

For each of the following, explain and indicate by a graph the possible effects on demand, supply or both for chocolate ice cream.

A severe drought in the Midwest causes dairy farmers to reduce the number of

milk - producing cattle in their herds by a third. These dairy farmers supply cream

that is used to manufacture chocolate ice cream.

A) A new report by the American Medical Association reveals that chocolate does, in

fact have significant health benefits.

B) The discovery of cheaper synthetic vanilla flavoring causes the price of vanilla ice

cream to fall (assume vanilla ice cream is a substitute for chocolate ice cream).

D) New technology for mixing and freezing ice cream lowers manufacturers’ costs of

producing chocolate ice cream.

Answer 1

Answer

A) The dairy farmers supply cream that is used to manufacture chocolate ice-cream. The cream is produced by milk. Now, if a severe drought causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third, then the total milk production will decrease. The decrease in milk production will decrease the amount of cream production. As a result, the supply of cream will decrease. The demand for cream remains unchanged. So the price of cream will rise. The rise in the price of cream, one of the ingredients to produce chocolate ice-cream, will increase the cost of production of chocolate ice-cream. As a result, the production and thus supply of chocolate ice-cream will decrease. So the supply curve of chocolate ice cream will shift leftward.

This event is illustrated in the following figure;

In the above figure, the curve 'DD' is the demand curve for chocolate ice-cream, and 'S1S1' is the initial supply curve of chocolate ice-cream.The point 'E₁' shows the initial market equilibrium point. After the increase in the cost of production of chocolate ice-cream, the production of  chocolate ice-cream has decreased. The decrease in the production decreases the supply of chocolate ice-cream, and thus the supply curve of chocolate ice-cream has shifted leftward to 'S2S2'. The demand curve is same as before. After the shift of the supply curve, the new equilibrium point is attained at point 'E₂'. This event increases the equilibrium price of chocolate ice-cream and decreases the equilibrium quantity of chocolate ice-cream.

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B) The American Medical Association reveals that the chocolates have significant health benefits.

This event will increase the demand for chocolate ice-cream. Thus the demand curve for chocolate ice-cream will shift rightward. This is explained in following figure;

In the above figure, the curve 'SS' is the supply curve of chocolate ice-cream, and 'D₁D₁' is the initial demand curve for chocolate ice-cream.The point 'E₁' shows the initial market equilibrium point. After the American Medical Association's report, the demand for chocolate ice-cream has increased. The increase in the demand for chocolate ice-cream causes a rightward shift of the demand curve of chocolate ice-cream to 'D₂D₂'. The supply curve of chocolate ice-cream is same as before. Over time, this event increases the equilibrium price of chocolate ice-cream and also increases the equilibrium quantity of chocolate ice-cream as the increase in price increases the quantity supply. Thus after the shift of the demand curve, the new equilibrium point is attained at point 'E₂'.

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C). The vanilla ice-cream is a substitute of chocolate ice-cream. When the price of vanilla ice-cream decreases, the quantity demanded for vanilla ice-cream increases. This event will reduce the demand for chocolate ice-cream. Thus the demand curve for chocolate ice-cream shifts leftward. This is illustrated in the following figure;

In the above figure, the curve 'SS' is the supply curve of chocolate ice-cream, and 'D₁D₁' is the initial demand curve for chocolate ice-cream.The point 'E₁' shows the initial market equilibrium point.The increase of the demand for vanilla ice-cream causes a decrease in the demand for its substitute, chocolate ice-cream. The decrease in the demand for chocolate ice-cream causes a leftward shift of the demand curve of chocolate ice-cream to 'D₂D₂'. The supply curve of chocolate ice-cream is same as before. Now, after the shift of the demand curve, the new equilibrium point is attained at point 'E₂'.

This event decreases the equilibrium price and quantity of chocolate ice-cream.

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D) The new technology lowers the cost of production of chocolate ice-cream.

This event will increase the total production and thus the market supply. So the supply curve will shift rightward.

In the above figure, the curve 'DD' is the demand curve for chocolate ice-cream, and 'S₁S₁' is the initial supply curve of chocolate ice-cream.The point 'E₁' shows the initial market equilibrium point. After the development of technology and thus the increase in production, the supply of chocolate ice-cream increases. This event will shift the supply curve of chocolate ice-cream rightward to 'S₂S₂'. The demand curve is same as before. After the shift of the supply curve, the new equilibrium point is attained at point 'E₂'. The decrease in the cost of production and increase in supply decreases the equilibrium price of chocolate ice-cream and increases the equilibrium quantity of chocolate ice-cream.

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