Homework Help: Econ problem2

1. Feb 14, 2008

jalen

Improved grain production methods and increased acreage have more that offset population increases. As a result prices remain low for grain.
Describe how this would be interpreted on a supply and demand diagram.

Here's what I have so far:
-demand decrease, supply increase
-price decrease, quantity/supply increase, demand increase (shifts right)

2. Feb 14, 2008

EnumaElish

Why does demand decrease? Declining population?
Why does demand shift right? Does population suddenly start to increase?

You need to look at the supply-demand diagram carefully. The axes are price and quantity. If anything happens to either of these variables you can see it on the diagram. And, as far as this diagram is concerned, the only way in which the equilibrium price or quantity can change is through a change in the positioning of the demand curve, or a change in the positioning of the supply curve, or both. Can you see why? (Where does the equilibrium occur? Fix your eye on that point on the diagram. Now try to imagine that point "moving around." How can you get that point move around? [Answer: by moving either the demand curve, or by moving the supply curve, or by moving by both curves.])

That doesn't mean that demand and supply are determined by price only. There may be 1,000 other factors influencing demand (population, income, income distribution, etc.) and 2,000 other factors influencing supply (technology, land, entrepreneurship, etc.). Each of these additional factors determine the positioning of the D curve and the S curve on the diagram. We cannot see those factors on the diagram, except indirectly through the placement (positioning) of the D and the S curves on the diagram. Although we cannot see these factors, we can represent the effect of a CHANGE in any of these factors on the D and/or the S curve, depending on whether the factor that is changing is a D factor or an S factor.

For example, if population increases, it is likely that the D curve will shift to the right. (What happens to equilibrium price and quantity?) If there are technological improvements then it is likely that the S curve will shift to the right. (What happens to equilibrium price and quantity?)

Given these right-shifts in both of the D and the S curves, how do you interpret the statement "grain production methods and increased acreage have more that offset population increases"? What does this statement imply in terms of the shift in the D curve and the shift in the S curve? Which one was greater (more of a shift)? What is the net effect on price after both shifts? Why?

Last edited: Feb 14, 2008
3. Feb 14, 2008

jalen

The demand for the supply of grain has generated a high amount of income for the farmers. Therefore with the amount of income made from the demand of supplies sold, the farmers are able to purchase more land to expand in their grain production. Now since they've expanded with more land for grain production, the prices of the grain will remain low due to the abundance of grains produced. *Due to the large production of grains produced, it is a source of food that can be easily accessible to a growing population.*

population: if population increases, it is likely that the D curve will shift to the right resulting in an increase in the equilibrium price and increase in quantity

higher demand for grain products will directly relate to the increase in the supply of grain

I believe the demand curve has a greater shift because without the demand of a product the supply won't increase

Price will increase because of the limited number of supply produced and higher demand from consumers

4. Feb 15, 2008

EnumaElish

Here's how I interpret the statement "grain production methods and increased acreage have more that offset population increases":

1. there was an autonomous improvement in technology and land usage (by "autonomous" I mean "independent of the current grain prices," economists usually use the word "exogenous" to mean the same thing). As a result, more grain can be produced (supplied) at a given price. Since the supply curve shows the amount (quantity) of grain supplied at any given price, the statement "more grain can be produced (supplied) at a given price" is graphically represented as a right-shift of the supply curve.

2. there may have been some population increase. An increase in population means that at any given price, more people will demand grains. Since the demand curve shows the quantity of grain demanded at any given price, the statement "at any given price, more people will demand grains" is graphically represented as a right-shift of the demand curve.

3. When the demand curve is not shifting, the right-shift of the supply curve means a lower equilibrium price.

4. When the supply curve is not shifting, the right-shift of the demand curve means a higher equilibrium price.

5. Since both the demand curve and the supply curve shifted to the right, there were two opposite effects on the equilibrium price, one "up," one "down."

6. Since the problem states that "grain production methods and increased acreage [supply factors] have more that offset population increases [demand factor]," it must be that the supply curve shifted more than the demand curve. As a result, the downward movement of the equilibrium price was greater than the upward movement of the equilibrium price. The net effect was a downward movement of the equilibrium price. This explains the statement (part of the problem) "prices remain low for grain."

See attached graph. D0 is the demand curve before population increased. S0 is the supply curve before acreage increased. D1 is the demand curve after population increased. S1 is the supply curve after acreage increased. Point A is the equilibrium point before either the population or the acreage increased. Point B is the equilibrium point after both the population and the acreage increased. Can you identify points E and F?

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Last edited: Feb 15, 2008