Question

1. Explain the law of supply. Why does a supply curve slope upward? Explain the law of demand. Why does the demand curve slope downward?

 

 

2. Suppose the total demand for soybeans and the total supply of soybeans per month in the Kansas City grain market are as follows:

Thousands of bushels demanded	Price per bushel	Thousand of bushels supplied	Surplus (+) or shortage (-)
95 90 85 80 75 70	$3.75 4.25 5.00 5.50 6.30 7.90	82 83 85 87 89 91	_____ _____ _____ _____ _____ _____

     

      a. What is the equilibrium price? What is the equilibrium quantity? Fill in the surplus-shortage column and use it to explain why your answers are correct.

b.   A trade war has impacted the market for soybeans and foreign buyers are no longer purchasing soybeans from the U.S. What will happen to the equilibrium price and quantity for soybeans?

c. The drought conditions in the midwestern states have finally eased and farmers are planting more acres in soybeans. What will happen to the equilibrium price and quantity in the market for soybeans.

d. If (b) and (c) happen at the same time what is the ultimate outcome on the market for soybeans?

 

 

Answer 1

1.

Law of supply

The law of supply states that, keeping other factors constant, an increase in price results in an increase in quantity supplied. In other words, there is a direct relationship between price and quantity: quantities respond in the same direction as price changes.

The supply curve above the shut down point is the marginal cost curve for a competitive firm.

Why does a supply curve shift upwards.

The supply curve shifts upwards due to diminishing marginal returns. When production is increased by adding more and more variable factors of production, like labor, to a fixed factor of production, such as machinery, the marginal returns will fall. Marginal product is the additional product produced when one additional unit of labor is added. When the marginal product falls due to decreasing returns then the marginal cost increases. The firms have a higher cost of production. The firms can sell an additional unit at a higher price. That is why the supply curve slopes upwards.

Law of demand

1. The law of demand states that there is an inverse relationship between price and quantity demanded, other things remaining the same. When price increases, quantity demanded falls. When price falls, quantity demanded increases. The slope of the demand curve is negative.

Why does the demand curve slope downwards

The demand curve is the marginal benefit curve. As the quantity of goods, a consumer buys increases his marginal benefit will fall. That is why he will buy more if the price falls. At lesser quantities, his marginal benefit will be high and he is willing to buy less at a higher price.

 

2.

Thousands of bushels demanded	Price per bushel $	Thousands of bushels supplied	Shortage/surplus
95	3.75	82	-13	Shortage
90	4.25	83	-7	Shortage
85	5.00	85	0	Market equilibrium
80	5.50	87	7	Suplus
75	6.30	89	14	Suplus
70	7.90	91	21	Suplus
a) Market equilibrium is when quantity demanded equals quantity supplied, which is $5.00 per bushel.
b)
Shortage occurs when quantity demanded exceeds quantity supplied.
Surplus occurs when quantity supplied exceeds quantity demanded.
b)
Demand curve shifts to the left (decreases), the equilibrium price and quantity fall.
c)
Supply curve shifts to the right, equilibrium quantity increases and price falls.
d)
A decrease in demand and an increase in supply will cause a fall in equilibrium price, but the effect on equilibrium quantity cannot be determined.