a. Assume that there is a marketing campaign by public health departments encouraging consumers to eat...

a. Assume that there is a marketing campaign by public health departments encouraging consumers to eat more bananas because of health benefits (e.g. bananas are rich in essential vitamins and minerals, plus are a good source of fibre). Meanwhile, there has been recent flooding in North Queensland which has impacted on this year’s banana crop. (North Queensland supplies about 80% of Australia’s banana supply). Depict these events on a Demand and Supply diagram. Indicate the shifts with arrows. You can also use different colours for the curves to make the diagram clearer. (Note you do not need numbers for this; the diagram itself will help you answer what is required here.) From your diagram, determine what will happen to the new equilibrium price and quantity for the Australian banana market. That is, after the changes in demand and supply as described above and drawn on your diagram, will the equilibrium price of bananas this year be higher, lower or indeterminate (i.e. ambiguous) from the information given? Likewise, will the equilibrium quantity of bananas be higher, lower or indeterminate from the information given (i.e. ambiguous)?

Solutions

Expert Solution

A favorable marketing campaign will increase the demand for bananas and a flood leading to crop destruction will decrease the supply of bananas. Higher demand will shift the demand curve rightward, increasing price and increasing quantity, at the same time, lower supply will shift the supply curve leftward, increasing price and decreasing quantity. The net effect is a definite increase in price. But quantity may rise, fall or remain unchanged depending on magnitude of shift in demand and supply curves. If rightward shift in demand curve is higher (lower) than leftward shift in supply curve, quantity will increase (decrease), and if both curve shift by equal magnitude, quantity will remain the same.

In following graph, D0 & S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0. As D0 shifts right to D1 and S0 shifts left to S1, they intersect at point B with higher price P1 and quantity Q1. Since rightward shift in demand is depicted to be higher than the leftward shift in supply, Q1 is higher than Q0.

Rahul Sunny answered 1 year ago

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