Question

Scenario: Soybeans are produced in many countries of the world, including Brazil. Consider the market for soybeans in Brazil. Assume that the world price is below the domestic equilibrium price.

a. In a graph, show how large the amount of imported soybeans is (no numerical answer required). Also, show the area on the graph that represents revenue that Brazil soybean farmers receive.

b. Now let’s consider the effect of drought. On a new graph, show what happens to the total revenue Brazil soybean farmers receive when a drought occurs in Brazil compared to part A

c. Explain your answer to part b) in words

d. Using a new graph, show what happens to the total revenue that soybean farmers receive in case of drought in all soybeans producing countries except Brazil

e. Explain your answer to part D in words

Now the scenario changed: the effect of a change in tastes. Assume that the world price is below the domestic equilibrium price and that soybean-based bread suddenly becomes more popular among Brazilian consumers.

f. Compared to your original graph in part A, show what happens to consumer surplus from this change in tastes

g. Explain your answer into part F in words

h. Compared to your original graph from part A, show what happens to producer surplus and imports from this change in tastes.

i. Explain your answer to part H in words

Answer 1

a) Suppose below is a standard demand and supply graph, with price on vertical axis and quantity on horizontal axis. Blue line is supply curve and orange one is demand. Equilibrium price is where the two intersect, but since the world price is lower than this (equal to point F), the local sellers can only sell quantity equal to what's represented by point D, and the amount equal to the distance DC is imported, so that the consumers are able to get the full quantity they demand at this lower world price. Local Soybean farmer's revenue is equal to the area represented by the rectangle FADE.

b) New graph with a draught in Brazil resulting in reduction in supply of local Soybean (but having no effect on the global supply or imports).

c) As a result of the draught, local supply of Soybean shrinks in Brazil moving the supply curve leftwards (now shown by the black upward sloping line). Since global supply hasn't been affected we assume that imports can still be made at the same global price for a higher quantity. The new (lower) revenue the local farmers is represented by the rectangle EFGH.

d) A draught globally (except Brazil) would result in the horizontal (lower price) line disappearing and the demand / supply and price will be determined by the local demand and supply curves as follows:

e) Since there is no lower global price which is available (as there is no supply / imports available now from abroad), the local market will determine the price and quantity for Soybean as represented by point B in the graph above. This price is higher than the earlier price (the lower global one) and quantity is lower (as there's no import available).

f) Soybean based bread becoming more popular in Brazil implies higher demand at same prices meaning that the demand curve will shift rightwards (represented by the black downward sloping line in the graph below). Consumer surplus is higher to the extent of the area bounded between the two demand curves till point A. Assuming that the Soybean is still available at the (lower) world prices)

g) You would recall that point B represented world price, in the original answer. Now with the shift in demand curve (people wanting more of Soybean at the same prices as earlier), the new point is A, where quantity consumed is represented by point D. Since the consumers are willing to pay more for each price level now as compared to the period prior to the change in their tastes their consumer surplus increases.

h) Pls see the blue shaded region for producer's surplus, which is unchanged from part A.

i) Since the supply curve hasn't shifted between part A and part G, there is no change to producer's surplus. There's however a change in imports. The quantity supplied locally remains unchanged (since the supply curve is unchanged and the price (teh global one which is applicable) is also unchanged. But since the demand is higher, the amount of imports is higher by the distance CD in the graph in part f.