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 for toasters will decrease. This is because bread and toasters are complementary goods — they are often used together. If bread becomes more expensive, people might buy less bread, and as a result, they may have less need for a toaster.
Effect on the Demand Curve:
The demand curve for toasters will shift to the left. This shift indicates that at every price level, consumers are now willing to purchase fewer toasters due to the increased price of bread.
Effect on Equilibrium:
On a standard supply and demand diagram:
- The original demand curve (D1) intersects the supply curve (S) at the original equilibrium point E1, with equilibrium price P1 and quantity Q1.
- After the increase in bread prices, the new demand curve (D2) lies to the left of the original.
- The new intersection point E2 shows a lower equilibrium price (P2) and a lower equilibrium quantity (Q2) for toasters.
This results in a fall in both the price and quantity of toasters sold in the market.
Diagram Description:
Price
│
│ S
│ |
│ |
│ E1● | D1
│ | /
│ E2● | / D2
│ | /
└───────┴─────────────── Quantity
- D1 = Original demand curve
- D2 = New demand curve (shifted left)
- S = Supply curve
- E1 = Original equilibrium
- E2 = New equilibrium
Conclusion:
When the price of a complementary good like bread increases, the demand for its paired good, like toasters, decreases. This causes the demand curve to shift left, resulting in lower equilibrium price and quantity for toasters. This relationship is crucial in understanding how markets for related goods interact in economics.