Question

In recent years the cost of producing organic produce in the U.S. has decreased largely due technological advancement. At the same time, more and more Americans prefer organic produce over conventional produce. Which of the following best explains the effect of these events in the organic produce market?

1. Both the supply and demand curves have shifted to the right. As a result, there has been an increase in both the equilibrium price and the equilibrium quantity.

2. The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium price and an uncertain effect on the equilibrium quantity.

3. The supply curve has shifted to the left and the demand curve has shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.

4. Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.

Answer 1

Answer-Option 4-Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price.

Explanation-We know that technological advancement shifts the supply curve to the right and increased demand also shifts the demand curve to the right.

As the cost of producing organic produce in the U.S. has decreased largely due technological advancement, the supply curve will shift to the right. This will increase quantity supplied and reduce price. Again,as at the same time, more and more Americans prefer organic produce over conventional produce, the increased demand for organic produce shifts the demand curve to the right. As a result quantity demanded will increase and equilibrium price will also increase. However, although both the quantity demanded and quantity supplied increase in each case, the market price falls and in one case and it rises.

In order to derieve the equilibrium price and quantity, we need to consider the combined effect od demand and supply shift. While doing this we will see that the equilibrium quantity is increased in both shifts, but the price has once increased and once decreased. Thus, when multiple shifts in demand and supply curves are considered to arrive at equilibrium price and equilibrium quantity, the equilibrium price may rise or fall depending on the magnitudes (degree/amount) of changes in demand and supply.

So, option-4 i.e. 'Both the supply and demand curves have shifted to the right. As a result, there has been an increase in the equilibrium quantity and an uncertain effect on the equilibrium price' is correct.