How Do Peanut Butter Prices Affect Demand for Jelly?
QUESTION: Please help explain 'Supply and Demand' and what determines 'Demand'.
ANSWER: Glad you asked. This is the essentials of Economics. Here is a Real-World Example: How Peanut Butter Prices Affect Demand for Jelly.
Goods are often related. This means that one economic event can affect multiple markets. Goods are not isolated in some sort of single-market vacuum. A change in the price of one good can affect it and other goods as well. However, the effects will be different!
Consider an increase in the price of peanut butter. When the price of peanut butter increases, there is a decrease in the quantity demanded for peanut butter (an upward movement along the peanut butter demand curve). This is the first law of demand.
The demand for jelly will also be affected. Remember that peanut butter and jelly are complements. Because we are consuming less peanut butter, we consume less jelly also, even though the price of jelly didn't change. The demand for jelly decreases (jelly demand curve shifts inward).
Now consider the impact of a rise in the price of peanut butter on the demand for a substitute like almond butter. The demand for almond butter will also be affected. In the previous tip, peanut butter and jelly were complements. Because we are consuming less peanut butter, we consume less jelly also, even though the price of jelly didn't change. With substitutes, the effect works in reverse. Consumers tend to buy peanut butter or almond butter, but not both. A rise in the price of peanut butter will lead many consumers to substitute almond butter for peanut butter, hence the demand for almond butter will rise (its demand curve shifts to the right).
So there you have it! Your real world lesson in Economics!