\"The price on wheat has fallen from $9 a bushel to $7 a bushel in the past seve
ID: 1223720 • Letter: #
Question
"The price on wheat has fallen from $9 a bushel to $7 a bushel in the past seven months as rain and snow fell on the southern states." [Source: The Wall Street journal, February 12, 2013] Explain the effect of the fall in the wheat price on the market equilibrium for cereals. For those unfamiliar with U.S. geography, it is safe to assume that it is typically dry and hot in the U.S. southern states. {Hint: Identify three aspects: (1). How does falling wheat price affect supply of cereal, if there is any effect at all. (2) How does falling wheat price affect demand for cereal in the U.S. -- if there is any effect at all. (3) What happens with the equilibrium quantity and price on the market for cereal. it might help to draw a graph to answer the question -- you don't need to upload that graph.]
Explanation / Answer
Assume it is typically dry and hot in the U.S. southern states.
1.According to the law of supply, other things remaining the same, quantity supplied of a commodity is directly related to the price of the commodity. In other words, quantity supplied increases with the increase in price and decrea With a fall in price of wheat from $9 a bushel to $7 a bushel, there is disequilibrium in the cereal market. ses with a fall in price and vice versa, other things remaining equal. Here in this case, with the fall in price of wheat, supply for cereals decreases. Diagramatically, there is contraction in supply curve. Thus, less is supplied due to lower price.
2. According to the law of demand, other things being equal, the quantity demanded increases with a fall in price and diminishes when price increases. Thus, with a fall in price of wheat, there is extension in demand for cereals in the U.S. Extension in demand for cereals refers to rise in quantity demanded of cereals due to low price. Thus, diagramatically, there is a movement from left to right on the same demand curve.
3. With a fall in price of wheat from $9 a bushel to $7 a bushel, there is disequilibrium in the cereal market.
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