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. Since corn and wheat are considered to be substitue goods, a fall in the price of the corn will increase the demand of the corn as per law of demand. This will reduce the quantity demanded of wheat in the market and there will be a leftward shift in the demand curve of the wheat.

2. Since sugar and wheat are not very much related with each other, a fall in the price of sugar will have no impact on the wheat market. Only the demand of sugar will rise in the sugar market.

3. An expected lowering of price will increase the quantity demanded of wheat in the market as per law of demand. This will lead to movement along the demand curve.

4. Creation of wheat specific fertiliser will help in increasing the supply of wheat in the market. This will cause a rightward shift in the supply curve of wheat and will increase equilibrium quantity supplied and will lower down the equilibrium price.

5. We are considering wheat and grain as substitutes. If price of grain rises, demand for wheat will rise and if price of grain falls, there will be a decrease in quantity demanded of wheat. There is a direct relationship between price of one substitute good and demand for other substitute good. These are the price determinants.

Non price determinants include price of raw material (affects supply), change in technology (affects supply), change in taste and preferences of consumer (affects demand), change in the price of complementary goods (affects demand) etc. These factors will cause a shift in the curves instead of movement.