Question

Consider the market for wheat. For each of the cases below state with a reason whether demand and/or supply would change and what would happen to the equilibrium price and quantity of wheat as a result. Fully explain your decision including any assumptions you make. You do NOT need to draw diagrams for this question but fully explain your answers

1. A fall in the price of corn

2. A fall in the price of sugar

3. An expected lowering in the price of wheat in the future due to ongoing excellent global growing conditions

4. The creation of wheat specific fertiliser.

5. Explain the possible non-price determinants involved in a change in both the demand and supply for wheat and a substitute grain.

Answer 1

1. Corn being one of the substitutes of wheat, would have a fall in demand for wheat, when its (corn) price falls. As price for corn falls demand for corn increases and at the same time demand for wheat falls whereas supply will remain unchanged. We take an assumption that consumers are behaving rationally, therefore, a fall in price of a corn would result in fall in demand for its substitute good i.e. wheat as consumer can buy more corn now. As a result, with supply remaining unchanged and with a fall in demand, both equilibrium price and equilibrium quantity of wheat will fall.

2. A fall in price of sugar would leave no impact on demand, suppy, equilibrium price and equilibrium quantity of wheat, as wheat and sugar are unrelated goods.

3. When price of a good is expected to fall in near future, demand for the good, at current price falls, whereas supply increases. Considering wheat, at the current price, producers are willing to supply more as their profits will be higher at current rate but consumers will be demanding less as they want to buy at lower price in the future. As a result, with quantity remaining same, a fall in demand and rise in supply would leave equilibrium quantity unchanged and will decrease equilibrium price.

4. With a creation of specific wheat fertilizer, production of wheat will increase, with increasing supply of wheat. As supply increases and unchanged demand, equilibrium quantity will increase and equilibrium price will fall.

5. Lets see what affect would non-price determinants would have on demand for wheat and its substitute grain:

• Income - when income increases, cosumer can buy more of any good, as his purchasing power increases. With increase in income, consumer's demand for wheat will increase with supply remaining same. And now, since consumer can afford more wheat his quantity demanded for a substitute grain will fall.
• Seasons - seasons affect demand and supply drastically. The demand for wheat will peak around the season when it grows more resulting in decrease in demand for its substitute good, while the rest of year, consumers will consume its substitute grain.
• Taste and preference - a consumer will prefer more of that good, for which he develops better taste or that good is preferred to him than any of its substitutes. His demand for wheat will rise if he prefers wheat more and demand for substitute grain will fall.