Question

Agree or Disagree with the following statement and why.

I think that if the price of beer were to go up, then the supply of pizza would increase. If beer was to cost more that would be less money people could spend on pizza. Which would mean more pizzas would be left uneaten, which could result in less pizzas being made and sold in the future. I think the demand for pizza would go down. As stated before if the price of beer goes up there is less money for pizza. This leads to less people drinking as much and wanting pizza with it. I think the quantity supplied for pizza would be higher. More pizza would be sitting in wait then what should be, since less people would be able to buy pizza if they are buying beer. The quantity demanded would decrease due to less people being able to buy beer or not having enough money for both. The price of pizza would probably decrease. That would be the way to try and help offset the problem raising the cost of beer created. So that the supply and demand for both pizza and beer can equal back out to a steady point.

Answer 1

To explain the case study, it is important to realize the concepts of related goods in economics. These goods are either complementary to each other, or are supplements to one another. Complementary goods are those, the demand for which moves in the same direction. I.e with a decrease in demand for one product, the other one also sees a decreased demand, and with an increase in demand the demand for the other one also rises. The exact opposite is true for supplementary goods.

In the case above, the products are complimentary in nature i.e the demand is connected and with price rise in one product if the demand for one goes down it also reflects on the second product ie pizza and beer.

Therefore, if the demand reduces the prices will have to correct themselves or the people buying the product will have to shell out more money for buying similar quantity of product which they earlier were.

To bring an equilibrium to reduced demand prices correct themselves if they effect profits in the long run until an equilibrium price is reached which equates demand and prices of the two products.

Therefore, in the case study all of the above statements are TRUE

Conclusion:-

Since the demand for beer and pizza are complimentary to one another, they rapidly affect one another and tend to move in the similar direction. Also, reduced demand has a pressure on the supplier to reduce prices in the long run so as to maintain same levels of profits respectively.

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