Question

Consider the market for Domino’s pizza. Illustrate graphically how an increase in the price of tomato sauce would affect the Domino’s Pizza market.

Answer 1

Tomato sauce is used an input by the Domino's pizza.

So, an increase in the price of tomato sauce will result in an increase in input cost of Domino's Pizza.

This increase in the input cost will result in a decrease in the profit-margin of the Domino's Pizza.

This reduction in profit-margin will compel the Domino's Pizza to reduce their production which in result will lead to decrease in supply.

This decrease in supply will shift the supply curve of Domino's Pizza to the left.

Following is the required figure -

As the above figure shows that, initially, Domino's Pizza market was in equilibrium at point E with equilibrium price being P per pizza and equilibrium quantity being Q pizzas.

Now, with decrease in supply, the supply curve has shifted to the left from S to S1.

New equilibrium is attained at point E1 with new equilibrium price being P1 and new equilibrium quantity being Q1.

Thus,

An increase in the price of tomato sauce has resulted in an increase price and decrease in quantity in the Domino's Pizza market.