Question

3. Two events occur simultaneously in the market for CDB oil:

Event 1: Scientists at Texas A&M University discover a better way to fertilize marijuana plants so that the plants produce twice as much CDB oil.

Event 2: The New England Journal of Medicine publishes research results showing “conclusively” that consumption of CDB oil stimulates sex drive in men and women users.

Using demand and supply analysis (i.e., draw a graph and label all curves and axes) predict what is likely to happen to the equilibrium price of CDB oil and the equilibrium quantity of CDB oil. You must explain how each event affects demand or supply and show these changes in your graph.

Answer 1

The technological advancement described in even 1 will increase the supply of CDB oil, shifting supply curve rightward, decreasing price and increasing quantity. The favorable health report described in event 2 will increase the demand for CDB oil, shifting demand curve rightward, increasing price and increasing quantity. The net effect is a definite increase in quantity. But price may rise, fall or remain the same depending on whether rightward shift in demand curve is higher than, lower than or equal in magnitude to the rightward shift in supply curve.

In following graph, D0 & S0 are initial demand & supply curves intersecting at point A with initial price P0 & quantity Q0. As D0 shifts right to D1 & S0 shifts right to S1, they intersect at point B with higher quantity Q1 and price P1, which is higher in graph since rightward shift in demand curve is more than the rightward shift in supply curve.