Question

There is a competitive market for dog treats in Earltown. What would happen to the equilibrium price and quantity of dog treats if a study showing that treats improve dogs’ behavior is published at the same time that two of the main dog-treat distributors shut down? Use a supply and demand graph in your analysis.

Answer 1

Treats improve dog behaviour means the demand for dog treats increases. Demand curve shifts right. So Equilibrium price rises and equilibrium quantity rises.

Two main dog treat distributors shut down, it means the supply decreases. Supply curve shifts leftward. So, equilibrium price rises and equilibrium quantity falls.

When both the events occur at the same time.

Equilibrium price rises but the equilibrium quantity can rise, fall or remain constant, depending on the intensity of demand and supply change.

So there are 3 possibilities-

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