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Suppose that this summer is hotter than usual, which induces more consumers buying cold drinks and...

Suppose that this summer is hotter than usual, which induces more consumers buying cold drinks and frozen food. At the same time, the heat wave destroys harvest of sugar cane that results in a rising price of sugar.
a. Given that more cups of ice-cream are sold in this summer, with the aid of a supply-and-demand diagram, explain how the above changes affect the market for ice-cream.

b. Does the law of demand hold in the above case?
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Answer #1

a.

Since this summer is hotter than usual and so more consumers are buying ice-cream. So, the demand for ice-cream this summer will increase. This will lead to the usual demand curve shifted rightward. Similarly, on the other side, the heatwave destroys the harvest of sugar cane that results in a rising price of sugar. This will affect ice-cream supply in the market. It means ice-cream supply this summer will be reduced and so the usual supply curve shifted leftward. How these changes affect the market for ice-cream is shown in Figure 1.

Figure 1 PRICE QQ! QUANTITY

As shown in the figure, initial demand and supply were D and S respectively. The market equilibrium was at E point where equilibrium price was OP and equilibrium quantity was OQ. But his summer, demand and supply changes to D’ and S’ respectively. The new market equilibrium is established at point E’ where the equilibrium price was OP’ and equilibrium quantity was OQ’. It means that now, the equilibrium price has increased and the equilibrium quantity has decreased.

b.

No. In this case, the law of demand does not hold. The law of demand says that the price of a good and its quantity demanded maintains an inverse relationship between them. It means people demand more at a lower prices and less at a higher prices. But this time due to more preference people demanded more ice-cream at an even higher price.

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