Daily Review -- Supply and Demand

On the graph, Market for Pep UP! show what happens to the market equilibrium when the price of sugar donuts increases.  Assume that sugar donuts and Pep UP! Soda are complements. 

Print out this graph, decide which curve moves, and draw the new curve.  Check your answer below.

The answer expected for the AP exam is that the demand curve shifts to the left, the price falls as less is demanded.  The logic is as follows.  Juan consumes both soda and donuts.  If donuts cost more then he can afford less soda so his demand shifts.  There's a deeper logic going on here.  Economists assume that complementary goods have indifference curve that form a right angle.  When the price of one good falls, the consumer falls to a lower indifference curve because they have to consume less of both goods.  Here's another take.


Say Juan as $10 to spend on either donuts or soda and the price of each good is $1.  Juan can buy 5 of each good.  Now, if the price of donuts raise to $9, Juan only has enough money to buy 1 soda.  Juan's choices are constrained by his income.  Higher prices reduce his real buying power for both goods.  For more on complementary goods, click here.


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