A severe drought results indrastic fall in output of wheat, Analyze the chain of effect on market price. (6 marks)
As a severe drought results drastic fall in output of wheat, thus there will be a decrease in market supply of wheat.
As a result, the supply curve shifts parallely leftwards to S2S2 from S1S1. Thus, at the initial price OP1, holding demand unchanged, there exist excess demand equivalent to (Oq1 – Oq1') units of output. This excess demand will lead some of the consumers to pay a higher price in order to obtain the extra units of output. The rise in the market price will continue until it reaches OP2, where the new supply curve S2S2 intersects the initial market demand curve D1D1. The new equilibrium is established at point E2 with equilibrium price as OP2 and equilibrium output as Oq2. Thus, at the new equilibrium, the equilibrium price has risen, whereas, the equilibrium quantity has fallen.
As a result, the supply curve shifts parallely leftwards to S2S2 from S1S1. Thus, at the initial price OP1, holding demand unchanged, there exist excess demand equivalent to (Oq1 – Oq1') units of output. This excess demand will lead some of the consumers to pay a higher price in order to obtain the extra units of output. The rise in the market price will continue until it reaches OP2, where the new supply curve S2S2 intersects the initial market demand curve D1D1. The new equilibrium is established at point E2 with equilibrium price as OP2 and equilibrium output as Oq2. Thus, at the new equilibrium, the equilibrium price has risen, whereas, the equilibrium quantity has fallen.