How is the price of pizzas affected by the two factors in the following case:
A group of students argue that most pizza parlors have gone out of business, and as a result , have been increasing their prices of pizza. What would the effect be on the shifts of the demand and supply curve? (It can either be a shift in supply or a shift in both supply and demand, or a shift in demand but not supply)
Another group of students argue that pizza prices are increasing because the price of hamburgers are also increasing(which are called close substitutes) What would the effect be on the shifts of the demand and the supply curve? (It can either be a shift in supply or a shift in both supply and demand, or a shift in demand but not supply)
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When the price of a product increases, the quantity producers are willing to supply goes up and the quantity demanded by consumers comes down. The reverse happens when there is a drop in price. Due to the change in the quantity supplied and quantity demanded the price comes down in the former case and goes up in the latter. The result of this process is an equilibrium price and quantity that is acceptable by both producers and consumers.
If the number of pizza parlors is decreasing there is a drop in the quantity supplied. As a result consumers have to pay a higher price for the same product as there are no competitors that can be approached for a cheaper deal. The pizza parlors still open are now in a position to increase the price; in addition they have to supply a larger quantity to meet the demand of the consumers that was earlier met by the pizza parlors that have now closed down.
A close substitute of a product is one that a consumer can shift to without being affected adversely. As pizzas and hamburgers are close substitute consumers can eat either of the two with their price playing a big role in the decision made. If the price of one of them goes up consumers shift to the other. As the price of ham burgers is going up more consumers are shifting to pizzas. This increases the quantity demanded of pizzas and subsequently the price.
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