Answer to Question #163359 in Microeconomics for Dennis Yawson

Question

Explain the following statement using supply and demand curves

a.when fall army worms invade a country,the price of maize rises in the market.

b.when there is a coup in a country rich in iron ore, the price of building material rises.

c.when an economy is in recession,peoples income fall and hence the price price of restaurant meals falls

d.when a war breaks out in the middle east, the price of gasoline rises and the price of a used cadillac falls.

Answer 1

Solution:

a.). An invasion of fall army worms on the maize plantation will result in a massive decrease in maize production, which will affect the maize supply in the market. Since supply will be low and the demand constant, the price of maize will rise in the market. A decrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good. It will also cause an excess demand which will result into an increase in price and quantity demanded to decrease. As a result, the supply curve will shift to the left.

This can be illustrated by the below curve:

b.). A coup in some country rich in iron ore will affect the production and supply of iron ore which is used as raw material to produce building materials due to political instability. This shortage of iron ore, a key component for building materials will result to less building materials being produced and sold in the market. As such, the supply of building materials will decrease and with a constant demand cause the prices to increase.

A decrease in supply will cause an increase in the equilibrium price and a decrease in the equilibrium quantity of a good. It will also cause an excess demand which will result to increase in price and quantity demanded to decrease. As a result, the supply curve will shift to the left.

This can be illustrated by the below curve:

c.). During the recession, people’s income falls resulting in a decrease in demand for people eating in restaurants causing the prices of restaurant meals to be decreased in order to attract customers.

A decrease in demand will cause a fall in equilibrium price, and quantity of restaurant meals. As a result, the demand curve will shift to the left.

This can be illustrated by the below curve:

d.). When a war breaks out in the middle east, a lot of markets will be affected. The war will disrupt oil supplies because of lack of production, shifting the curve for gasoline to the left, resulting to an increase in the equilibrium price of gasoline. See figure 1

A rise in the equilibrium price of gasoline will increase the cost of operating a Cadillac since it uses gasoline. Therefore, the demand for used Cadillacs will fall, since people looking for cars won’t find used Cadillacs attractive. Also, the owners of Cadillac’s will attempt to sell them. As such, the demand curve for used Cadillac’s will shift to the left, while the supply curve shifts to the right, resulting to a reduction in the equilibrium price of used Cadillac’s. See figure 2

These two scenarios have been depicted by the below two curves:

Figure 1: