Question

Draw the demand and supply curves for the market for organic strawberries. Suppose that organic strawberries are substitutes for non-organic strawberries, and the price of non-organic strawberries has decreased. At the same time, the number of farmers growing organic strawberries has increased. On your graph, indicate the equilibrium price and quantity in the market for organic strawberries before and after these two changes and summarize the results. (Note: you do not need to provide any numbers on your graph).

Answer 1

Answer: Since organic strawberries are substitutes for non organic strawberries, a decline in the price of the non organic strawberries will lead to a rise in demand for non organic strawberries. As a result the demand for organic strawberries will fall which is represented by leftward shift of the demand curve from D1 to D2 for organic strawberries. Next, since the number of farmers who are growing organic strawberries has gone up will lead to a rightward shift in the supply curve from S1 to S2 of organic strawberries. When this happens the equilibrium price is surely going to fall. Earlier the equilibrium price was P1 and as a result of these two phenomenon price goes down. The equilibrium quantity can either increase or decrease depending on the size of the shift of the supply curve. If the supply increases by much more than the fall in the demand, the equilibrium quantity is higher than before. In the diagram, this is shown by shift in the supply curve from S1 to S2 and increase in equilibrium quantity from Q1 to Q2. The other case can be that of where the increase in supply is less than the fall in demand which is shown by shift of the supply curve from S1 to S2'. Here the equilibrium price falls by less than before and the equilibrium quantity falls from Q1 to Q2'. So the equilibrium price will fall but equilibrium quantity can either rise or fall.