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 the price of corn will change both demand and supply of wheat because they are substitutes both in production and in consumption. As a result demand for wheat will decrease, some wheat users will switch on to corn, while supply of wheat will increase, some corn producers will now produce wheat which is more profitable now. Consequentlyequilibrium pricefalls and equilibrium quantity of wheat remains ambiguous( uncertain)

2. A fall in the price of sugar will increase the supply of wheat, farmers will switch on from sugar crops to wheat crops, which is more profitable. Demand of wheat will remain unchanged, consequently equilibrium price of wheat will fall and equilibrium quantity will increase.

3. If sellers expect future price of wheat to fall, then supply of wheat will increase in the current period, supply curve shifts rightward,if buyers expect future price to fall then demand will decrease, Equilibrium price will decrease and equilibrium quantity will be ambiguous.

4.The creation of wheat specific fertilizer will increase production of wheat, so it will increase only supply of wheat, supply curve shifts rightward, equilibrium price falls and equilibrium quantity will increase.

5 Non price factors which change both demand and supply simultaneously are; future expectations, price of substitutes and compliments, time period etc