Eco212

Eco212

Use demand and supply analysis to illustrate the impact on the equilibrium price and quantity in the corn market of the following. (Note: assume linear demand and supply curves for all questions) a. The price of wheat goes up. ANS: b. The price of fertilizer goes up. ANS: (2) Bill O’Really of OX News observed that poultry (chicken and turkey) consumption in the US increased dramatically over the 2000 to 2006 period. This he believed was due to the fact that consumers, being more health conscious, switched from red meat to poultry, in an effort to eat healthier foods. Intrigued by these findings, Bill contacted the US Department of Agriculture for additional information. The department provided him with data that yielded two findings. First, there was a 75% decrease in the price of poultry over the period and second, there was widespread adoption of cost reducing innovations in poultry processing. Being a supposedly brilliant journalist, Bill concluded that the demand curve for poultry had shifted to the right. a. Is Bill’s conclusion correct or incorrect? Explain your answer using supply and demand diagrams. ANS:

Paper For Above instruction

The provided problem set explores key concepts of demand and supply analysis, specifically focusing on the factors influencing market equilibrium prices and quantities. This analysis is fundamental in understanding how external events—such as changes in related markets or technological innovations—affect the dynamics of supply and demand within a market. The discussion involves interpreting the effects of changing input prices and consumer behavior on equilibrium in the context of the corn market and poultry consumption, respectively.

Impact of Wheat Price Increase on Corn Market

The first question asks about the effect of an increase in the price of wheat on the equilibrium in the corn market. Although wheat and corn are different commodities, they can be substitutes or complements depending on their uses. Assuming that wheat and corn are substitute crops for farmers (i.e., farmers can choose to plant either crop), an increase in wheat prices would typically incentivize farmers to shift land from planting corn to wheat, reducing the supply of corn. On a supply and demand diagram, this scenario would be represented by a leftward shift of the corn supply curve, resulting in a higher equilibrium price and a decrease in the equilibrium quantity of corn. Conversely, if wheat and corn are used together or are complementary in some process, the increase in wheat prices could lead to a decrease in demand for corn, decreasing both the equilibrium price and quantity. However, most common in agricultural markets is the substitution effect, making the supply-side adjustment more relevant. Therefore, the expected outcome is an increased price of corn and decreased quantity, illustrating the interconnectedness of related agricultural markets (Mishkin, 2015).

Impact of Fertilizer Price Increase on Corn Market

Similarly, an increase in the price of fertilizer directly impacts the supply side of the corn market. Fertilizer is a key input in crop production; higher input prices increase the costs for farmers. As a result, the supply curve for corn shifts leftward, indicating a decrease in supply at each price level. This supply reduction causes the equilibrium price of corn to rise, while the equilibrium quantity decreases (Pindyck & Rubinfeld, 2018). The magnitude of the shift depends on the elasticity of supply and the proportion of fertilizer costs in total production costs. When fertilizer prices rise appreciably, it discourages production, leading to a higher market price for corn and a lower quantity traded (Varian, 2014).

Analysis of Poultry Consumption Increase and Demand Curve Shift

The second scenario examines the assertion by Bill O’Really regarding the increase in poultry consumption in the US between 2000 and 2006. Bill attributes this increase primarily to consumers' health consciousness, prompting a shift from red meat to poultry. At first glance, such a shift suggests a rightward movement of the demand curve for poultry. However, the data present conflicting evidence: a 75% decrease in poultry prices and widespread adoption of cost-reducing innovations in poultry processing.

A decrease in prices typically results from an increase in supply, a rightward shift of the supply curve, or a combination of both. Meanwhile, a shift in demand would generally be associated with higher prices unless counteracted by a simultaneous increase in supply. The widespread adoption of cost-reduction technology in poultry processing enhances supply by lowering production costs, leading to increased output and lower prices (Mankiw, 2015). The significant drop in prices suggests that the dominant market factor was an increase in supply, not a shift in demand.

Therefore, Bill's conclusion that demand shifted to the right is not fully supported by the data. The fundamental reason for the increased consumption appears to be the substantial reduction in poultry prices driven by technological advancements and supply expansion. While health consciousness may have had some influence, it is likely that the primary factor was the increase in supply, which lowered prices and stimulated demand through higher quantities sold (Krugman & Wells, 2018). Thus, the demand curve for poultry probably remained relatively unchanged, or potentially shifted right modestly, but the predominant movement was a rightward shift in supply.

Conclusion

Overall, demand and supply analyses reveal that market changes depend critically on the nature of external shocks and technological progress. In the case of the corn market, a rise in input costs (fertilizer) reduces supply, raising prices. A similar logic applies to related markets like wheat, where substitution effects influence supply choices. Regarding poultry consumption, technical innovations and resulting price decreases underscore the importance of supply-side factors, challenging the assumption that consumer health motivations alone drove demand shifts. Understanding these market mechanisms enhances insights into how various factors influence prices, quantities, and consumer welfare in real-world markets.

References

• Mankiw, N. G. (2015). Principles of Economics (7th ed.). Cengage Learning.
• Mishkin, F. S. (2015). The Economics of Money, Banking, and Financial Markets (10th ed.). Pearson.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W. W. Norton & Company.
• Krugman, P., & Wells, R. (2018). Economics (5th ed.). Worth Publishers.