Answer to Question #141856 in Economics for Mary Kwarteng

Question

According to the Australian Wool Innovation, severe drought conditions in Australia contributed to the lowest level of wool production in 50 years. This record low production has driven up prices sharply in Australian wool markets. Meanwhile, the price of raw cotton increased significantly for the first time in many years.

a. Illustrate this observation with one demand and supply graph for the market for Australian wool and another demand and supply graph for raw cotton.

b. Make sure that your graphs clearly show (1) the initial equilibrium before the decrease in the supply of Australian wool and (2) the final equilibrium.

c. Use arrows to indicate any shifts in the demand and supply curves for each market.

d. Label your graphs fully and write an explanation of your work.

Answer 1

In the market for Australian wool the supply will decrease, as a result equilibrium price will increase, and equilibrium quantity will decrease.

In the market for raw cotton the demand for raw cotton will increase, because cotton and wool are substitutes, as a result equilibrium price will increase, and equilibrium quantity will increase too.