Question

Bulgaria leads EU in Lavender Production

Europe is the world’s primary producer of lavender and lavender oil. Bulgaria increased its lavender production in 2008, causing the price of lavender oil to fall. In 2015, it replaced France, which has been facing problems related to crop disease and pests, as the EU leader of lavender production.

Source: bta.bg, October 4, 2016

a.           Explain the effect of falling lavender prices on the market for lavender oil.

b.           Now assume that there is a surge in the demand for lavender oil. What could be the effects on the price of lavender oil?

c.           If lavender pests and diseases are brought under control, do you expect additional oil distilleries to appear in France? Explain.

Answer 1

A) fall in lavender prices will lead to lower cost of production of lavender oil, leading to rise in supply as producer find the production cheaper than before .(leading to rightward shift of supply curve)

B) if there is sudden increase in demand for lavender oil , the price of oil will also increase, as in case of excess demand , price increases and producer is willing to produce more thereby increasing its output.( rightward shift of demand curve )

Net effect (from figure) - quantity increased from q to q 2

Price remained unchanged .

C) yes, as it will reduce the cost of production , and increase supply or production or quantity produced, so more distilleries.