Question

Question 2                                                                       

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 the price of corn:-

• Change in supply/ demand curve:- When there is fall in price of corn, then the demand cuve will shift backwards towards the left side because there will be fall in demand and there will be no chnage in supply curve.
• Effect on Equilibrium Price and Equilibrium Quantity:- When the demand curve shifts backward, as a result of this shifting the Equlibrium quantity demanded will decrease and simultaneously the Equilibrium Price will fall down.
• Reason:- Wheat and corns are Substitute goods. When price of a substitute good decreases buyer will buy more of the substitute good as he will get it at cheap rate and hence our demand will fall. Substitute goods are Positively related to each other. So when price of corn falls people will start buying more of corn and less of wheat.

2) A fall in the price of sugar:-

• Change in supply/ demand curve:- When there is fall in price of sugar, then the demand curve will shifts forward towards the right side because demand for wheat will increase and there will be no chnage in supply curve.
• Effect on Equilibrium Price and Equilibrium Quantity:- As a result of shifting of demand curve towards right side and supply curve remains constant, the Equilibrium Quantity demanded will increase and hence Equilibrium price also increases.
• Reason:- Wheat and sugar are Complementary goods. These are consumed in conjunction in various foods like bread, cakes, biscuits etc. In case of complementary goods a fall in price of complementary good will result in increase in demand of our product because people will now buy more of our product . Complementary goods are Negatively relaed.

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

• Change in supply/ demand curve:- When there is expectations that in future there will be fall in price of wheat, in this case the demand curve will fall backwards towards the left side as demand decreases, and supply doesnot change at present.
• Effect on Equilibrium Price and Equilibrium Quantity:- As a result of fall in demand of wheat, and supply being same, the eqilirium Price will fall along with fall in Equilibrium quanitity demanded.
• Reason:- When buyer will expect that there will be fall in price of Wheat in future, they will change their present demand and will reduce it as they will think that they have to pay less of the same product in near future.

4) The creation of wheat specific fertiliser.:-

• Change in supply/ demand curve:- The development of Wheat specific fertilizers will result in forward shift of supply curve while demand curve will remain the same. The Supply will increase.
• Effect on Equilibrium Price and Equilibrium Quantity:- As a result of increase in supply, the supply curve shifts forward and this will cause an increase in Equilibrium quantity demanded and fall in Equlibrium price.
• Reason:- As creation of wheat specific fertilizers, the technology improves this will lead to fall in cost of producing wheat. As a result the producers are willing to sell more at existing price . So the consumers will demand more wheat at lower prices.

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

• Market size:- If market size keeps on expanding, the supply will decrease and supply curve will shift bakward and simultaneously the buyers will shift their purchasing to other goods because supply is not able to cope up with demand.
• Branding:- Branding can be usd by the sellers to influence customers to buy theier products. As a result of branding like advertisement, product quality, customer service, buyers may develop storong prefernce of any product and may shift their purchasing towards the substitue and supplier have to cope up with the increase demand by reducing cost of production by using new technology.