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| Graphing Exercise: Supply and Demand The buying decisions of households and the selling decisions of businesses are brought together in a market. Here, market pressures created by surpluses or shortages serve to determine the price of the product and the amount bought and sold. Exploration: How do changes in supply or demand affect equilibrium price and quantity? Click here to view the excercise. It will open in a new browser window. Then answer the questions below. If you have clicked on the link above and cannot see the interactive exercise, you may need to install a free Java plugin for you internet browser. Click here for the plugin. 1. What is the likely effect on equilibrium price and quantity if corn farmers experience an extended period of bad weather? AnswerAn extended period of bad weather would reduce supply-a shift to the left of the supply curve. The poor weather will reduce corn crop yields, reducing the amount offered for sale to the market at each possible price. To see this, drag the supply curve to the left. Because consumers still wish to purchase the same quantity at the current price, the decrease in supply will create a shortage. Press the New Equilibrium button to see how market equilibrium is restored. The increase in price reduces the quantity consumers wish to purchase. 2. What is the likely effect on the equilibrium price and quantity of corn if the government requires ethanol (a corn byproduct) to be added to all gasoline to reduce emissions? AnswerRequiring the addition of ethanol would increase the demand for corn - a shift to the right of the demand curve. The amount demanded by ethanol producers would be added to the amount demanded by other corn consumers and result in a shortage at the current price. To see this, drag the demand curve to the right. Because corn producers still wish to produce the same amount at the current price, there will be a shortage unless the price changes. Press the New Equilibrium button to see how market equilibrium is restored. The increase in price increases the amount produced and offered for sale. 3. Suppose both of the above incidents occur - bad weather and a government ethanol mandate? How will the corn market be affected? AnswerSupply decreases with bad weather while the government mandate increases demand. Drag the supply curve to the left and the demand curve to the right and click on New Equilibrium to see the impact on price and quantity. You’ll notice that the price increases, but the quantity may rise, fall, or remain the same depending on the magnitude of the shifts in supply and demand. You should verify (by shifting the curves) that whenever both demand and supply change, the impact on either price or quantity will be indeterminate. 4. Experiment on your own: drag either the supply curve or the demand curve followed by pressing the New Equilibrium button. What generalizations can you draw with respect to changes in equilibrium price and quantity? AnswerAn increase in supply (drag the supply curve to the right) will increase quantity and reduce price, while a decrease in supply will decrease quantity and increase price. An increase in demand (drag the demand curve to the right) will increase both quantity and price, while a decrease in demand will decrease both quantity and price. |