Question

Figure 1 shows the short-run effect of a drought in a given time period that affected harmfully the production of wheat in North Dakota. Assuming other things being equal, the wheat supply curve has shifted leftward from S1 to S2 causing equilibrium price to fall from P1=$330 per bushel to P2 = $400 per bushel, and equilibrium quantity to fall from Q1= 200 million bushels to Q2=190 million bushels. Referring to Figure 1, which of the following is true?

Question 8 options:

	Figure 1 shows the cases of a "decrease in quantity supplied" and a "decrease in demand."
	Figure 1 shows the cases of a "decrease in quantity demanded" and a "decrease in supply."
	Figure 1 shows the cases of a "decrease in quantity demanded" and a "decrease in quantity supplied."
	None of the above.

Figure 1 shows the short-run effect of a drought in a given time period that affected harmfully the production of wheat in North Dakota. Assuming other things being equal, the wheat supply curve has shifted leftward from S1 to S2 causing equilibrium price to fall from P1=$330 per bushel to P2 = $400 per bushel, and equilibrium quantity to fall from Q1= 200 million bushels to Q2=190 million bushels. Referring to Figure 1, which of the following is true?

Question 8 options:

	Figure 1 shows the cases of a "decrease in quantity supplied" and a "decrease in demand."
	Figure 1 shows the cases of a "decrease in quantity demanded" and a "decrease in supply."
	Figure 1 shows the cases of a "decrease in quantity demanded" and a "decrease in quantity supplied."
	None of the above.

Answer 1

So Figure 1 demonstrates a leftward shift in supply. A leftward shift in supply raises prices and decreases quantity at equilibrium. Lets analyze the options -

Figure 1 shows the cases of a "decrease in quantity supplied" and a "decrease in demand.'' - Incorrect. Figure 1 is clearly a case of decrease in supply as drought impacts production levels and not consumption. Further a decrease in quantity supplied ocurs along supply curve when demand/prices have changed. There is no such movement here. So incorrect option.

Figure 1 shows the cases of a "decrease in quantity demanded" and a "decrease in supply.'' - Correct answer. The drought causes a leftward shift in the supply curve. The raises costs to supplier and so the price level rises due to which quantity demanded falls along the demand curve which results in the new equilibrium where price has risen and quantity has fallen.

Figure 1 shows the cases of a "decrease in quantity demanded" and a "decrease in quantity supplied.'' - Incorrect. A decrease in quantity supplied means movement along supply curve due to demand/price change and a decrease in quantity demanded means movement along demand curve due to supply/price change. In the figure there is a shift of supply. So option is incorrect. In any case two movement along the curves cannot occur simulataneously because quantity supplied and price is directly related while quantity demanded and price is inversely related.

None of the above is incorrect because the second option is correct.