Why would a merchant accept Bitcoin? I am trying to get the answer for the following example: 

Assume I have some bitcoin and want to buy a product from a merchant. Why would the merchant sell that product to me for bitcoin when he bought it from the supplier for dollars?
Because he can sell the bitcoin for dollars. And in many cases, his alternative would be to accept a credit card payment which costs him around 2%. Converting bitcoins to dollars costs around 0.2% -- one tenth as much. Also, if he accepts a credit card payment, he has to worry about a chargeback (where you claim the payment was unauthorized and the bank reverses the payment). Bitcoin has no chargebacks.