Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: a. An increase in the price of margarine.b. An increase in the price of milk.c. A decrease in average income levels. a. An increase in the price of margarine. Butter and margarine are substitute goods for most people. Therefore, an increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D 1 to D 2 in Figure 2.2.a. This shift in demand causes the equilibrium price of butter to rise from P 1 to P 2 and the equilibrium quantity to increase from Q 1 to Q 2 . Figure 2.2.a b. An increase in the price of milk. Milk is the main ingredient in butter. An increase in the price of milk increases the cost of producing butter, which reduces the supply of butter. The supply curve for butter shifts from S 1 to S 2 in Figure 2.2.b, resulting in a higher equilibrium price, P 2 and a lower equilibrium quantity, Q 2 , for butter.
Figure 2.2.b Note : Butter is in fact made from the fat that is skimmed from milk; thus butter and milk are joint products, and this complicates things. If you take account of this relationship, your answer might change, but it depends on why the price of milk increased. If the increase were caused by an increase in the demand for milk, the equilibrium quantity of milk supplied would increase. With more milk being produced, there would be more milk
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- Fall '19
- Supply And Demand, Px, price of butter