The impact of a drop in the price of margarine on the butter market
What happens in the butter market when there is a drop in the price of margarine?
a. Both the price of butter and quantity of butter fall.
b. The price of butter falls and the quantity of butter rises.
c. The price of butter rises and the quantity of butter falls.
d. Both the price of butter and the quantity of butter rise.
Answer:
A drop in the price of margarine, which is a substitute for butter, causes the quantity demanded and the price of butter to fall. Therefore the correct option is a.
When there is a drop in the price of margarine, which is considered a substitute for butter, it has a significant impact on the butter market. This change in price of margarine affects the demand and supply dynamics in the butter market.
As consumers see margarine as a cheaper alternative to butter due to the drop in price, they are more likely to substitute butter with margarine. This change in consumer preference leads to a decrease in the quantity demanded of butter. In response to this decrease in demand, suppliers in the butter market are likely to lower the price of butter to clear the excess supply.
As a result, both the price of butter and the quantity of butter fall. This is because the drop in the price of margarine stimulates a shift in consumer behavior towards the cheaper substitute, affecting the equilibrium in the butter market.
In conclusion, a drop in the price of margarine causes a decrease in the quantity demanded and the price of butter in the market. This illustrates how changes in the price of substitutes can have a ripple effect on related markets.