Answer to Question #309287 in Microeconomics for Thso

Question

The population in country C decreases, due to a lower birth rate. At the same time, there is an increase in the cost of fertilizer, which is used to grow vegetables. Explain how the market for vegetables will be affected by these changes. Clearly indicate how the equilibrium price and equilibrium quantity will be affected by these changes. Make use of a combination of diagrams and verbal explanation to explain your answer. Note that your diagrams should be properly annotated and that marks will be deducted for any missing labels on your diagram

Answer 1

Effects of population decrease due to low birth rate

The population decrease due to low birth rates will lead to a decrease in demand for vegetables due to the low population and thus lower consumption. The decrease in demand will lead to a shift in the demand curve to the left from D₀ to D₁ as indicated in the diagram below.

A shift in demand to the left will shift the equilibrium price from E₀ to E₁ which is lower compared to the original. The lower price will create a surplus in the market and thus cause a movement along the supply curve to the left indicating a lower supply. All this will lead to creation of a new market equilibrium with quantity reducing from Q₀ to Q₁ and price also reducing from P₀ to P₁

Effects of increase in fertilizer price

An increase in fertilizer price will lead to an increase in the cost of growing vegetables. This will lead to a decrease in supply of vegetables as producers will be willing to supply less at the equilibrium price. This will shift the supply curve to the left from S₀ to S₁ as shown in the diagram below

A shift in the supply curve to the left will shift the equilibrium price from P₀ to P₁ which is higher compared to the original. The increase in price will lead to decrease in quantity demanded leading to a new equilibrium quantity Q₁ down from Q₀