Question

15. Another supply and demand puzzle The market price of pizzas in a college town decreased recently, and the students in an economics class are debating the cause of the price decrease. Some students suggest that the price decreased because the price of dough, an important ingredient for making pizzas, has decreased. Other students attribute the decrease in the price of pizzas to a recent decrease in college student enrollment. The first group of students thinks the decrease in the price of pizzas is due to the fact that the price of dough, an important ingredient for making pizzas, has decreased. On the following graph, adjust the supply and demand curves to illustrate the first group's explanation for the decrease in the price of pizzas. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. Supply Demand Supply PRICE (Dollars per pizza) Demand QUANTITY (Pizzas)

Answer 1

First group: As price of raw material falls, producers will produce more of pizza to earn more profit. It will shift supply curve to its right from AS to AS1 which tends to reduce the price level from P to P1 and output rises from Y to Y1.

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Second group: As student enrollment fell, aggregate demand of pizza falls and shift the curve to its left from AD to AD1 which reduces the price from P to P1 and reduces output from Y to Y1.

Option A is correct as you can see in the above graphs that equilibrium quantity decreases when demand curve shift backward.