Final answer:
The increase in the price of milk causes a decrease in cheese supply, while a new health study increases cheese demand. These changes in supply and demand influence the market price of cheese, highlighting the basic principles of economics that govern market dynamics.
Step-by-step explanation:
The scenario described involves two main economic concepts: supply and demand. As the price of milk increases, which is a crucial input for cheese production, it becomes more costly for producers to make cheese, leading to a decrease in the supply of cheese by 80 pounds at every price point. This shift in supply would typically lead to an increase in price for the remaining supply of cheese on the market.
Simultaneously, a new study promoting cheese as beneficial for health has led to a 20% increase in consumer demand at all price levels. The rise in demand, assuming the quantity of cheese has remained the same or decreased due to the rise in milk prices, will exert further upward pressure on cheese prices. This is a classic example of the interplay between supply and demand, where external factors affect market prices and quantities.
In conjunction with this, the passage indicates that changes in production costs, such as inputs and technology, can influence supply. Furthermore, the expectations of sellers, such as weather conditions for crop production, can also impact the supply side of the market. The relationship between supply, demand, and prices is crucial in determining market outcomes.