Question

4. Explain the effect of each event on demand and supply in the specified market. Use a graph (or

graphs) to show the effect on the equilibrium price and equilibrium quantity. [3 marks each]

a) Early frost destroys a large percentage of the Canadian wheat crop. How does this affect the wheat market?

b) Scientists discover health benefits from drinking tea. How does this affect the market for coffee?

c) The World Health Organization (WHO) announces that processed meat causes cancer. How does this affect the market of bacon?

Answer 1

In following graphs, price (P) and quantity (Q) are measured along vertical and horizontal axes respectively. D0 and S0 are initial demand and supply curves, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(a)

Destruction of crop will decrease market supply of wheat. Supply curve of wheat shifts to left, increasing price and decreasing quantity of wheat. In following graph, S0 will shift leftward to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(b)

Tea and coffee are substitutes in consumption. Favorable health report on tea will increase the quantity demanded of tea, and decrease the demand for coffee. Demand curve for coffee shifts to left, decreasing price and decreasing quantity. In following graph, D0 will shift leftward to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(c)

Processed meat and (fresh) bacon are substitutes in consumption. Negative health report on processed meat will decrease the demand for processed meat and increase the demand for bacon. Demand curve for bacon shifts to right, increasing price and increasing quantity. In following graph, D0 will shift rightward to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.