Full Answer Section

• Changes in the price of related goods: If the price of a substitute good (like donuts) increases, the demand for cupcakes will increase, shifting the demand curve to the right. Conversely, if the price of a complementary good (like coffee) decreases, the demand for cupcakes will increase, shifting the demand curve to the right.  
• Changes in consumer expectations: If consumers expect the price of cupcakes to increase in the future, they may increase their current demand, shifting the demand curve to the right.  
• Changes in population: An increase in population will increase demand for all goods, including cupcakes, shifting the demand curve to the right.  

Impact on Supply and Market Equilibrium

Impact on Supply:

• Existing Bakeries: Existing bakeries may respond to increased demand by increasing production, hiring more workers, or expanding their operations. This could lead to a shift in the supply curve to the right.
• New Entrants: The increased demand and profitability of the cupcake market may attract new entrants, further increasing supply. This will also shift the supply curve to the right.

Market Equilibrium:

At the new equilibrium price point, the quantity demanded will equal the quantity supplied. This is because the market will adjust to the new demand and supply conditions. If the price is too high, there will be a surplus of cupcakes, leading to a decrease in price. If the price is too low, there will be a shortage of cupcakes, leading to an increase in price. The market will continue to adjust until the quantity demanded equals the quantity supplied.

Government Intervention: Price Ceiling

A price ceiling set below the equilibrium price will create a shortage of cupcakes. This is because at the lower price, consumers will demand more cupcakes than suppliers are willing to produce.  

Benefits and Sufferers:

• Consumers who can buy cupcakes at the lower price benefit from the price ceiling.
• Consumers who are unable to purchase cupcakes due to the shortage suffer from the price ceiling.
• Producers suffer from the price ceiling as they are forced to sell cupcakes at a lower price than they would like.

Unintended Consequences:

• Black Market: A black market may emerge, where cupcakes are sold at a higher price than the legal price ceiling.  
• Reduced Quality: Producers may reduce the quality of their cupcakes to maintain profitability.
• Shortages: Persistent shortages of cupcakes can lead to inconvenience and frustration for consumers.
• Misallocation of Resources: The price ceiling can distort the allocation of resources, leading to inefficient production and consumption.