Answer to Question #322530 in Microeconomics for Mulweli G

Question

The population in country C decreases, due to a lower birth rate. At the same time, there is an increase in the cost of fertilizer, which is used to grow vegetables. Explain how the market for vegetables will be affected by these changes. Clearly indicate how the equilibrium price and equilibrium quantity will be affected by these changes. Make use of a combination of diagrams and verbal explanation to explain your answer.

Answer 1

A decrease in population due to low birth rates causes a decrease in the consumption rate, which reduces the quantity of vegetables demanded. The decrease in quantity demanded shifts the demand curve to the left from D0 to D1.

The left shift of the demand curve will shift the equilibrium price E0 to E1, which is less than the original. A decrease in price means there will be a surplus of vegetables in the market and thus a left shift of the supply curve. Therefore there will be a new market equilibrium with quantity decreasing from Q0 to Q1 and reducing the price from P0 to P1.

An increase in fertilizer cost increases the production cost of growing vegetables. Therefore the vegetable supply will decrease as the suppliers supply less per the equilibrium price. Thus the supply curve will have a left shift from S0 to S1. This is shown in figure two.

A left shift of the supply curve shifts the equilibrium price from P0 to P1, which is higher than the original. An increase in price leads to a reduction in quantity demanded; thus, there is a creation of a new equilibrium quantity Q1 down from Q0