Question

Assume that the market for apples in the UK is in Equilibrium. The market for apples is described by the traditional demand curve and the supply curve. Since the market for applies is in Equilibrium (e1), there is an Equilibrium price P* and an Equilibrium Quantity Q*. Denote the demand curve as Dnq and the supply curve as Snq. The supply of apples is covered by a combination of domestic apple production (UK-based suppliers) and foreign apple production (non-UK-based suppliers). Discuss and illustrate graphically the scenario in 1 (a) Make sure to label the axes and the curves and to indicate significant points as appropriate. (b) In order to promote the domestic apples production, the UK Government now imposes a quota on apple imports. Assume that only half of the previously imported apples are permitted to be imported and sold onto the UK market. Discuss and illustrate graphically the derivation of the new supply curve for apples following the imposition of quota on apple imports. In your answer, you should discuss and illustrate the three stages when it comes to the derivation of supply curve for apples, which embeds the effect of quotas. (i) Determine the UK-based supply curve (denoted as SUK) and discuss any point of interest. Denote the corresponding quantities and price as QUK* and P* respectively. (ii) Show and discuss the effect of the quota on foreign supply before the quota (denoted SnqF) and after the quota (denoted as SqF). Denote the corresponding quantities and prices as “QqF / P-”, “QnqF/P*”. (iii) Show and discuss the UK total supply curve with the quota (denoted as SFUK). Denote the corresponding quantities and prices as “QUK+QqF/ P-”, “QUK*+QqF / P*”. Make sure to label the axes and the curves and to indicate significant points as appropriate. (c) Having derived the supply curve for apples after the imposition of the quota let us return on the market for apples as depicted by the demand curve and the supply curve that incorporates the quotas.

Answer 1

Given above is the demand and supply interaction of apples before the import quota was imposed. P* AND Q* represents the equilibrium price and quantity. The supply curve shows the supply by both local and foreign producers.

The above graph shows the effect of quota on supply by UK producers. After the quota was imposed the total supply of apples will come down which leads to excess demand for apples in the UK market. This leads to an increase in the price of the apples, as the price increases it is now profitable for UK producers to produce more apples, hence the production of apple increases in the UK and the supply will increase which results in the rightward shift of supply curve depicting supply by local producers.

The above graph is depicting the demand curve for apple in the UK and the supply curve showing the supply by foreign producers. After the quota imposes, the supply by foreign producers will cut down by half resulting in the leftward shift of the supply curve

The above graph is depicting the market demand and supply curve for apples. After the quota will be imposed the supply by foreign producers will cut down by half but the supply by local producers will increase, but whether the increased supply by the local producer will be able to match the fall in supply by foreign producers or not is ambiguous. The above graph shows the case when the total supply actually falls. There might be the case when the local producers produce enough apples to match the reduced supply by foreign producers.