What happens to the demand curve for toasters if the price of bread rises? Show in a supply-demand diagram how the equilibrium price and quantity of toasters change.
The correct answer and explanation is :
When the price of bread rises, the demand curve for toasters shifts. This happens because bread and toasters are complementary goods, meaning that they are often used together. If the price of bread increases, people may buy less bread, which in turn can lead to a decrease in the demand for toasters, since fewer people will be making toast. As a result, the equilibrium price and quantity of toasters will change.
Explanation:
- Effect on Demand:
Toasters and bread are complementary goods. An increase in the price of bread will make bread less affordable or less attractive to consumers. Consequently, fewer consumers will buy bread, and in turn, fewer toasters will be needed for making toast. Therefore, the demand for toasters decreases. - Shifting the Demand Curve:
The decrease in demand for toasters causes the demand curve to shift to the left. This shift indicates that at each price level, the quantity of toasters demanded is now lower than before the price of bread increased. - Impact on Equilibrium:
As a result of the leftward shift in the demand curve, there is a new equilibrium where the quantity of toasters supplied is equal to the quantity demanded at a lower price and quantity. The equilibrium price of toasters will decrease because the lower demand reduces the pressure on producers to maintain high prices. Likewise, the equilibrium quantity of toasters sold will also decrease since fewer people are buying them due to the change in demand.
Diagram:
- The initial equilibrium is where the original demand curve (D1) intersects the supply curve (S).
- After the price of bread increases, the demand curve shifts left to D2, and the new equilibrium is where D2 intersects the supply curve. This new equilibrium point reflects a lower equilibrium price and a lower equilibrium quantity of toasters.
In summary, when the price of bread rises, the demand for toasters decreases, shifting the demand curve to the left, leading to a decrease in both the equilibrium price and the equilibrium quantity of toasters.