Question

1. Suppose there has been a drought in the Midwest in this upcoming spring which causes a decline in the amount of grain available in the market. What will happen to the supply curve for grain for the summer of 2021? Does supply curve shift? What happens to the price of grain?

Answer 1

A drought in the midwest in the spring of 2021 will reduce the output of grains from farms, thereby reducing the availability of grains in the market. Summer of 2021 follows spring and there will be a severe reduction in the supply of grains which are grown in spring and harvested by summer. This reduction in supply of grains is due to a factor other than price and the factor is a drought in the spring.

When supply of grains changes due to a factor other than price, there will be a shift in the supply curve and since this case is a fall in the supply of grains, this will cause a leftward shift in the supply curve. Othe things remaining unchanged, demand curve will not shift. In this case, there will be a shortage of grains because demand exceeds supply. To eliminate this shortage, there will be an upward pressure on the price of grains.Thus, price increases.

In the given diagram, x-axis shows quantity of grains and y-axis shows price of grains. DD is the initial demand curve and SS is the initial supply curve. E is the initial equilibrium where DD and SS intersects (demand=supply) , P is the initial price and Q is the initial quantity. When there is a fall in the supply of grains in summer 2021 due to the drought in the spring of 2021, the the supply curve shifts leftwards from SS to new supply curve S1S1. The new intersection of demand curve DD and supply curve S1S1 happens at E1 where demand and supply are equal at a new equilibrium price P1 and new equilibrium quantity Q1. Equilibrium price has increased and equilibrium quantity has decreased.