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

Wheat and corn are substitute goods .The substitute goods are those which can be used in place of another goods .So a fall in the price of corn would result in a fall in demand for wheat. So the demand curve will shift leftwards for wheat.Corn is less expensive to purchase than wheat and hence demand for corn rises and wheat falls. Here as the demand curve shift leftwards,the equilibrium price for wheat decreases and quantity demanded also decreases.

Wheat and sugar are unrelated goods. So a fall in the price of the sugar would not effect the equilibrium price or quantity demanded for wheat.

Expectations about future also affect demand for good and services today. If it is expected that price of wheat will fall in the future due to excellent growing condition, consumers will demand less now and will buy more wheat in the future. It is because they will get wheat at lower price in the future and hence quantity demanded falls today .The seller on the other hand will increase the supply of wheat because it will earn more profit by selling wheat at today's price than in the future. So the supply curve shifts rightwards.The equilibrium price will decrease for wheat but what happens to quantity demanded depends on the magnitude of the shifts of both the curves.

The creation of wheat specific fertiliser would result in increase in supply of wheat as more wheat can be produced. As supply increases, price for wheat will decrease.