Question

Consider the U.S. market for fast food in the medium run with two changes occurring. First, public health groups have been pursuing public health campaigns against consuming foods that are high in sodium and saturated fat and highly processed foods. Second, technology, such as ordering online and through apps, has reduced the need for as many in-store workers. Explain in words and graphically the effect that such simultaneous changes may have had on equilibrium price and quantity in the U.S. fast food market. Be sure to explain the specific mechanisms at work

Answer 1

When, structural changes take place in any economy, it experiences what is often known as a shift in equilibrium price and quantity demanded.

In the current scenario, the demand for the goods sees a decline and the overall price would fall. The new equilibrium price would have to be lesser thant the current price, since the demand is not present for the current price levels.

This can be explained with the help of the following diagram.

Price D2 Q2Q1 Quantity of Goods

Earlier, the equilibrium was at point P2 and Q2. Due to a decline in the quantity demanded, the supply side would also see a decline and the meeting point would be P1 D1 where the equilirbium would strike for the market.

As for the labor force, a decline in the requirement for labor would lead to lesser wages for the labor force. This happens because the demand decline and decline in profits would leave no room for workers. When workers are fired they would have to accept lesser salaries for themselve. In the form of a diagram this is as follows:-

This can be explained as follows:-

Wages Quantity of Labor

The demand for labor force declines from curve D0 to curve D1 and as a result the wage shifts to a lower level from point W0 to Q1 this reduces the overall equilibrium level in terms of labor force from E0 to E1 and the quantity demanded from Q0 to Q1 respectively.

Please feel free to ask your doubts in the comments section if any.