Answer to Question #129371 in Microeconomics for arshiam Zafar

Question

“A bumper crop will generally lower the income of farmers”. Illustrate this preposition using a supply-demand diagram.

Answer 1

Solution

A bumper crop implies an increased supply of crop in the market due to the many farmers supplying the product.This leads to a change in the crop demanded, which is triggered by a decrease in price. This is illustrated graphically below.

Consider the effect of a shift in the supply curve. Here S and D are original supply and demand curves. The two curves meet at point E. So $p_0$  and $q_0$  are the original equilibrium price and quantity.Now let's examine the effect of the bumper harvest on the supply and demand curves.

An increase in supply implies that a larger quantity is offered for sale at the same price ($q_2$ , instead of $q_0$  at $p_0$ ) or the same quantity at a lower price (as point G indicates). In other words, an excess of supply of $q_0$  $q_0$  (=EH) develops at the original price $p_0$ . It sets in motion market forces which cause the price to fall.

Since there is not much demand for their product, farmers find it difficult to sell the entire output at the original price. They start charging lower price. Consumers know about it and start paying a lower price. Consequently price starts falling and it ultimately reaches the value $p_1$ . At this new price the equilibrium quantity is $q_1$ . Thus we can conclude that the rightward shift of the supply curve (i.e., an increase in the supply of the crop) causes a fall in the equilibrium price and an increase in equilibrium quantity. This generally lowers the income of farmers.