Question

Draw and label a graph that depicts an upward-sloping supply curve and two linear downward-sloping demand curves in the market for Purina pet food. Label one demand curve D1 and the other demand curve D2. D1 should be steeper than D2. Both demand curves and the supply curve should intersect at the same point. - From the article: "Companies... are grappling with how much they can raise prices to offset higher costs for energy, raw materials and transportation..." Refer to the graph you drew to answer the previous question. Describe how an increase in the price of energy used to produce Purina pet food will shift the supply curve. (I) Would the shift in the supply curve cause a greater change in the price of Purina pet food if the demand curve were D1 or D2? (II) Would the shift in the supply curve cause a greater change in the quantity sold of Purina pet food if the demand curve were D1 or D2? From the article: "... for the full-year, Nestlé reported revenue of 94.42 billion Swiss francs... up from 87.09 billion francs in 2021 . It said growth was driven by strong demand for its petcare and coffee products. However, ... profit fell to 9.3 billion francs from 16.9 billion francs in the previous year..." Briefly explain what must have caused Nestlé's profit to decrease even though its revenue from sales increased.

Answer 1

An increase in energy prices shifts the supply curve for Purina upward, leading to a greater price change with a steeper demand curve (D1) and a greater quantity change with a flatter demand curve (D2). Nestlé's decline in profits, despite increased revenue, implies that rising production costs outpaced the growth in sales revenues.

Step-by-step explanation:

An increase in the price of energy, a production cost for Purina pet food, will shift the supply curve upward or leftward. This is because higher production costs mean that at every price, less is supplied as it becomes more costly to produce.

If we had two demand curves, D1 and D2, with D1 being steeper than D2, the increase in production costs would cause a greater change in price with D1, the steeper demand curve. This is because a steeper demand curve indicates that consumers are less sensitive to price changes, so the quantity demanded decreases less when price increases. With D2, the flatter demand curve, we would see a smaller change in price but a greater change in quantity sold, since consumers here are more sensitive to price changes.

Nestlé's revenue increase accompanied by a profit decrease suggests that the costs of production, including energy, raw materials, and transportation, have risen substantially. Even though revenue from sales increased, it was offset by these higher expenses, leading to a decline in net profits.