Because bagels and cream cheese are often eaten together,...

Because bagels and cream cheese are often eaten together, they are complements. a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern-a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer. b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern-a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer.

Because bagels and cream cheese are often eaten together, they are complements.
a. We observe that both the equilibrium price of cream cheese and the equilibrium quantity of bagels have risen. What could be responsible for this pattern-a fall in the price of flour or a fall in the price of milk? Illustrate and explain your answer.
b. Suppose instead that the equilibrium price of cream cheese has risen but the equilibrium quantity of bagels has fallen. What could be responsible for this pattern-a rise in the price of flour or a rise in the price of milk? Illustrate and explain your answer.

Key Concepts

Equilibrium Analysis

Equilibrium analysis involves studying the point where supply and demand intersect, determining the prevailing market price and quantity. Changes in one market can spill over into another market when the goods are related, as seen with complementary goods. For example, improvements in one market may lead to increased demand in the complementary market, thus altering equilibrium conditions in both.

Input Price Shocks

Input price shocks refer to sudden changes in the costs of raw materials or inputs used in production, which directly affect the supply curve of the affected product. A fall in the price of an input, such as flour used in bagel production, reduces manufacturing costs and can shift the supply curve to the right, leading to changes in equilibrium prices and quantities. Conversely, a rise in the price of an input, such as milk used in cream cheese, increases production costs, shifting the supply curve to the left and affecting equilibrium outcomes.

Complementary Goods

Complementary goods are products that are often used together, such that a change in the demand or price of one affects the demand for the other. When consumers use these goods jointly, an increase in the consumption of one typically drives up the consumption and demand for its complement, and vice versa.

Supply and Demand Shifts

The concepts of supply and demand shifts are central to understanding how changes in market conditions, such as input prices or external factors, affect the equilibrium price and quantity. An increase in supply shifts the supply curve to the right, potentially lowering equilibrium prices but increasing quantities, while a shift in demand can raise or lower both the equilibrium price and quantity depending on the nature of the change.

Transcript

00:01 Here i have drawn the markets for bagels and cream cheese, so we can figure out if these two scenarios a and b are caused by shocks to the price of flour or the price of milk.

00:11 So in scenario a, we observed that the price of cream cheese at equilibrium increases and the quantity of bagels increases.

00:19 We want to know if it's a fall in the price of flour or fall in the price of milk that may have caused this.

00:25 So if we assume that flour is an input for bagels and milk is an input for cream cheese, we can see how this affects both of their supplies.

00:34 So first let's do a fall in the price of flour.

00:36 So if the price of flour decreases, more people are willing to supply bagels because the inputs are cheaper.

00:42 So we're going to shift our supply to the right, just like that.

00:46 So this is going to cause, so this was our original equilibrium point, this is going to increase our equilibrium quantity, which is good.

00:54 That's what we wanted for bagels, right? and then if we are increasing our equilibrium quantity for bagels, since cream cheese and bagels are eaten together and they are complements, if more people are eating bagels, more people are going to be demanding cream cheese.

01:07 So let's shift that out to the right.

01:09 So this is our original equilibrium, and this is our new.

01:13 So we're saying that we're increasing our price, right? so this is exactly what we wanted to figure out for scenario a, right? we wanted the quantity of bagels to increase and the price of cream cheese.

01:24 Cheese to increase.

01:25 So it's looking like for scenario a, let's type this at the bottom here.

01:30 So it's looking like it could be explained by a fall in the price of flour.

01:38 Now let's just model a fall in the price of milk to see what would happen there.

01:42 So i'm going to reset our markets.

01:45 Okay, so if there's a fall in the price of milk, that means that supply for cream cheese will shift to the right, right, because more people are willing to supply if the inputs are cheaper.

01:53 All right, so so shifting our supply to the right.

01:57 And right off the bat, we can see that this is not going to be our scenario, right, because the price of cream cheese is falling.

02:05 Now, if we were to go through the rest of this scenario, since more people want cream cheese, right, the quantity is increasing.

02:11 Then demand for bagels will shift out.

02:14 And this will increase quantity, right? but this is in our full scenario because price of cream cheese decreases.

02:19 So we're sticking with our original solution.

02:22 Oh, i'm not sure where it went.

02:23 But we know that it's the price of flour that fell in order for this to occur.

02:29 All right...

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