AFRE 265 – Ecological Economics
Activity 3 – Equilibrium
The objective of this exercise is to improve your ability to analyze markets using market supply and market demand graphs (which we just call supply and demand graphs from here on out). The concepts of market equilibrium, total surplus, disequilibrium, and effects of shifting curves will be developed.
Consider the market demand and market supply for strawberries as shown on Table 1.
Table 1: Markey supply and market demand for strawberries
|Price||Quantity Demanded (Kg)||Quantity Supplied (Kg)|
- (2.5 points) Graph (approximately) the demand and supply curves for strawberries according to Table 1. Label the demand curve D1 and label the supply curve S1. Identify the equilibrium price P1* and the equilibrium quantity Q1* (you should be able to do this exactly).
Graph 1: Market supply and market demand for strawberries
- (1.5 points) What is the total surplus (total producer surplus and total consumer surplus added together) in the strawberry market at the equilibrium you identified in part a)?
- This question supposes the price in the strawberry market moves the market into disequilibrium. Calculate regions of total surplus using areas of triangles and subtraction to answer 3i. and 3ii. (Hint, in disequilibrium the quantity exchanged, or the prevailing quantity, is the lower value between Qs and Qd..)
- (1.5 points) Consider a market price of $6. In this case the market would no longer reach equilibrium so total surplus will be smaller than if the price was P1*. How much lower would total surplus be if the market price was $6? What do we call the resulting mismatch between quantity supplied and quantity demanded at this price?
- (1.5 points) Consider a market price of $3.50. In this case the market would no longer reach equilibrium so total surplus will be smaller than if the price was P1*. How much lower would total surplus be if the market price was $3.50? What do we call the resulting mismatch between quantity supplied and quantity demanded at this price?
- Suppose that there is a major drought that drastically affects the strawberry crop this year.
- (1.5 points) Using Graph 1, illustrate the effect of this drought on the strawberry market (holding other factors constant). Shift the appropriate curve(s), indicate how you shifted your curve(s) with arrows, and label any new curves appropriately (i.e D2 or S2). Clearly identify the new equilibrium price P2* and new equilibrium quantity Q2*.
- (1.5 points) Based on your graph, how is total surplus different under the new equilibrium compared to the one you found for question #1)? Why? (what happened to equilibrium price and equilibrium demand?) (Hint: It helps to shift A LOT instead of a little to get a clear effect that is straightforward to describe.)