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. A fall in price of corn will reduce the demand for the wheat in the market, as the corn and the wheat are substitute goods of one another so if the price of corn decreases then the people will use the substitue good more and the demand of the wheat will reduce. There will be fall in demand so the equilibrium price will fall too.

2. There will be no efffect on the demand of the wheat ,as sugar is not related to the demand of wheat as it is neither a substitute good and nor a complimentary good to wheat. The equilbrium price and equilibrium quantity will remain same.

3. This will reduce the present demand of wheat as the people will plan to buy in future, so it will increase the aggregate demand of the wheat. As aggregate demand is the planned or estimated demand for the future. This will increase as more people would buy wheat in a lower price because of law of demand. The equilibrium price will fall in future and due to which equilibrium quantity will increase.

4. Increase in supply of wheat, as there will be wheat specific fertilizer so the supply of wheat will increase as the production of the wheat will be easier. The demand of the wheat will remain same in the short run ,so in short run there will be reduction in equilibrium price as the supply will be more than the quantity demanded so people will pay less for the wheat and there will be surplus in the market. In the next cycle of market adjustments the demand of wheat will adjust due to fallen prices and the demand will increase in a long run.

5. The possible non-price determinants involved in a change in both the demand and supply for wheat and a substitute grain are the ones which do not involve price of wheat or a substitute good. These are change in technology if the wheat or any other substitute come up with a new and advanced technology so the supply of it will increase and which will increase the demand, change in consumer preferences if there is change in preferences of the consumers in favor of wheat then its demand will increase or vice versa, expectations of the buyers if the buyers expect the price to be lower in future then they will reduce the present demand.