Answer to Question #70305 in Microeconomics for hisham adel abdo
The market price of pizzas in a university town increased recently, and the students in an economics class are debating the cause of the price increase. Some students suggest that the price increased because several pizza parlours in the area have recently gone out of business. Other students attribute the increase in the price of pizzas to a recent decrease in the price of beer.
those two groups refer to two economic concepts - the first one is the free market forces which, according to the theory, balance the supply and demand and result in a single price for a particular good. So once several pizza parlours in the town have gone, the quantity of pizzas supplied decreases and the market for pizzas reaches a new equilibrium price, higher than the previous one. According to the other economic concept pizzas and beer are complementary goods and the decrease in the price of beer results in the increased demand for pizzas. It is highly possible that both concepts are applicable in this case and they both have an impact on the pizza pricing. It is hard to say, though, to which extend those factors influence the pizza price since we have no information about the structure of the local pizza market (that is, how many parlours were there before, how many pizzas they supplied and how much the market has contracted etc.) as well as we have no information about the gastronomical predilections of the locals.