Beer and potato chips are complementary products. The laws of demand and supply hold in both markets. Also note that hops are an agricultural input into the production of beer. Potatoes are an input into the production of chips.
We observe the following:
In the beer market, the quantity traded increases and the price falls.
In the chip market, the quantity traded increases and the price rises.
What fact could explain the market observations above?
An anti drink-driving campaign by the government reduces alcohol consumption.
New scientific research is released that shows that consumption of potato chips reduces blood pressure.
A drought in regional areas where hops are grown reduces hop production.
An extra-long growing season in hops growing regions leads to higher than typical hops yields.
Seasonal rains increase the output of potatoes.
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This social sciences question concerns the economics and business aspects of pricing and profit because it illustrates the power of demand and supply in determining costs.
We are told that beer and potato chips are complementary products. This means that both products appeal to the same type of consumer, are in a similar price bracket and often enjoyed together, and are both affected by the laws of supply and demand. Both markets are sensitive to the same conditions. This is because both products rely on natural production which in turn is affected by outside forces such as weather, rainfall, etc. Hops are an agricultural input into the production of beer because they are grown on farms and there are limits to the extent that producers can control the conditions. Potatoes are an input into the production of chips and are also grown rather than made so again we need to look at environmental forces affecting the supply.
We are told that in the beer market, the quantity traded increases and the price falls whereas in the chip market, the quantity traded increases and the price rises. We need to look at unusual changes in the supply rather than the demand as the quantity traded appears to increase for both products. We also need to identify what could explain the market observations.
An anti drunk-driving campaign by the government reduces alcohol consumption, yet we are told that the quantity traded actually increases so this is unlikely to be the cause as retailers buy according to demand.
New scientific research showing that consumption of potato chips reduces blood pressure would make people want to buy loads more potato chips, not less—so that answer is unlikely too because the availability/production costs of potatoes remain unchanged; there is no reason for the price to rise.
A drought in regional areas where hops are grown could be very significant however as this reduces hop production which makes them more expensive, pushing beer production/raw ingredient costs up and causing everyone to bid higher for the smaller available pool.
An extra-long growing season in hop growing regions would lead to higher than typical hops yields and this might even result in a glut where there are too many unwanted hops as people are not drinking extra beer. This would also apply to potatoes if seasonal rain produced extra.
It therefore seems most likely that drought has caused the changes in pricing/costs. Scroll down the link page for many other enotes insights on this topic.
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