Question

In 2003, a single case in Alberta of bovine spongiform encephalopathy, also known as mad cow dicease, temporarily shut down export markets for Canadian beef.

a) Using firm and industry diagrams, show the short-run effect of declining demand for Canadian beef due to the shutdown of its export markets. Label the diagram carefully and write out in words all of the changes that you can identify.

b) Although export markets eventually began to open up later that same year, the demand for Canadian beef remained low. On a new diagram, show the long-run effect of the declining demand. Expainl in words

Answer 1

The figure below shows that the declining demandfor beef shift the industry demand curve from D₁ to D₂ which further reduces the quantity from Q₁ to Q₂ and price from P₁ to P₂ which affects the firm and firm has to reduce its quantity fro q₁ to q_2. Before the decline price there was zero profits and then profits are negative as average total cost exceeds price.

b

Figure below shows the decline demand for beef in the long run. Because firms were started losing money in the short run, some firms left the industry, which shifts the supply curve from S₁ to S₃. The shift of the supply curve increased the price back to its original level, p₁. As a result, the industry output falls to Q₃. Firms that remained in the industry, the rise in the price from P₂ to P₁ puts them to their initial situation, producing quantity of q₁ and earning no profits.