Question

Consider the market for wheat in Australia.

a) Explain the law of demand? [1 mark]

b) Explain the difference between a ‘change in demand’ and ‘a change in quantity demanded’. Use a demand/supply diagram(s) to help explain your answer. [4 marks]

c) Discuss two (2) non-price factors that could influence market demand for wheat in Australia. [4 marks]

d) Discuss two (2) non-price factors that could influence market supply for wheat in Australia.

[4 marks]

e) Draw a demand/supply diagram illustrating the market equilibrium price and quantity for

wheat in Australia. Suppose that the price of fertiliser (used by a farmer to help grow wheat)

increases. Explain fully the effect this change will have on the market for wheat. Show this

adjustment on your diagram. [7 marks]

Answer 1

Ans.
a) Law of demamd states that as price of a good increases then quantity demanded of that good decreases and vice versa, keeping all else constant

b) Chnage in demand is when demad changes due to factors other than price like price of related goods, tastes and preferences etc. This leads to a shift of demand curve.

Change in quantity demanded of the good is change in quantity demand ef due to price of the good everything else remains constant. This will lead to movement along the demand curve.

c) Non- price factors,

- A study found that wheat is not good for health and should not be consumed on daily basis. This will lead to decrease in demand for wheat

- Price of all purpose flour, which is a substitute to price, falls leading to people substuting all purpose flour for wheat. This will decrease the demand for wheat.

d) Non price factors

- Government gives subsidies to wheat farmers for their inputs, this will lead to increase on supply of wheat

- Price of fertilizers fall in the market and fertilizers are used as one of the inputs in wheat production increasing the supplh of wheat.

e) Increase in price of fertilizers will cause production cost of eheat to increase leading to decrease in supply of wheat shifting the supply curve leftwards to S' from S. This will lead to increase in price of wheat which will lead to decrease in quantity demanded of wheat causing equilibrium quantity of wheat to fall to Q' from Q and increase in price of wheat from P to P'.

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