Question

The price of apples used to make apple pies has decreased. At the same time, people expect the price of apple pies decrease significantly in the future. Given these two effects, what will happen to the current equilibrium quantity and price of apple pies

Answer 1

The price decrease of apples may lead to a lower equilibrium price for apple pies, but the current equilibrium quantity is uncertain due to conflicting effects of reduced production costs and consumer expectations of future price decreases.

Step-by-step explanation:

When the price of apples, a key ingredient for making apple pies, decreases, this typically leads to a decrease in the production costs for apple pies. Lower production costs can allow suppliers to offer apple pies at a lower price, which might increase the equilibrium quantity of apple pies that consumers are willing to buy and suppliers are willing to sell. However, if people expect that the price of apple pies will decrease significantly in the future, they may delay their purchases in anticipation of lower prices. This expectation can temporarily decrease the current demand for apple pies.

Therefore, the current equilibrium quantity of apple pies could either increase due to the lower cost of production or decrease due to consumers waiting for future price drops. This uncertainty about the direction in which the equilibrium quantity will move implies that we need to assess whether the effect of the cost reduction or the effect of the expectation of future price decreases is stronger. The current equilibrium price is expected to decrease, given that lower production costs and future price expectations both contribute to downward pressure on prices.

Answer 2

Equilibrium quantity of apple pies increases whilst the price of apple pies decreases

Step-by-step explanation:

Supply is defined as the quantity of a particular good or service that suppliers are willing to produce at a given period of time for a given price. Many factors can affect supply. For example, the number of producers, cost of production, and advancements in technology.

Apples is a major cost in the production of apple pies. When the cost of apples fall, cost of production of apple pies is also likely to fall. Thus, suppliers are willing to produce more since it is cheaper now. This will cause a right-hand shift in the supply curve (refer diagram attached).

The right hand shift causes:

1. Supply curve to move from S1 to S2.

2. Quantity supplied increases from QS1 to QS2.

3. Price falls from P1 to P2.