Answer to Question #250526 in Microeconomics for Muskan

Question

1.     In each case below use a single supply-and-demand graph to show the events in the indicated market. Label the initial and final price and quantity on the graph. Provide a brief explanation.

(a)    Cotton. Farmers can grow either cotton or melons on their land and the initial equilibrium price of cotton is 40 cents per pound. Then the demand for melons rises.

(b)  Wine. The initial equilibrium price of a bottle of wine is $20. Then there is a drought in the wine-growing region and the drought makes the wine nastier tasting than before.

(c)   The tomato market: The initial equilibrium price of tomatoes is $2 per pound. Then the price of tomato fertilizer falls. 

Answer 1

Solution:

a.). The initial price of cotton is at P₁ and the initial quantity is at Q₁, with the equilibrium at E₁. When the demand for melon rises, the price of melons will rise and thus the farmers will produce more melons than cotton. The increase in the price of melon will decrease the production and supply of cotton. The reduction in the cotton supply will shift the supply curve to the left, driving up the price of cotton from P₁ to P₂, as the quantity falls from Q₁ to Q₂, while the new equilibrium will be E₂.

 

This is depicted by the below graph:

 

 

b.). The initial price of wine is at P₁ and the initial quantity is at Q₁, with the equilibrium at E₁. The drought will shift the supply curve inward from S₁ to S₂ since the quantity produced will fall due to drought effects. Simultaneously, the demand curve shifts inward from D₁ to D₂, because people don’t like the taste of the wine as much. It’s difficult to determine whether the price will rise, fall, or remain unchanged, it will depend on the relative size of the supply and demand shifts but the quantity falls from Q₁ to Q_2.

 

This is depicted by the below graph:

 

c.). The initial price of cotton is at P₁ and the initial quantity is at Q₁, with the equilibrium at E₁.

The supply curve will shift outward from S₁ to S₂ since the cost of producing tomatoes will be reduced and there will be an increased supply of tomatoes in the market, driving down the price of tomatoes from P₁ to P₂, as the quantity demanded rises from Q₁ to Q₂. The equilibrium point will shift from E₁ to the new equilibrium E₂.

 

This is depicted by the below graph: