Question

Imagine you look at a market for walnuts. What happens to market supply in the following scenarios? Draw for each scenario a graph and show changes on the graph. Explain your answers. Use a separate graph for each scenario. a) The price to rent increases for a nuts tree machine. b) The US government increases their subsidies which are provided for walnuts farmers. c) A new, hybrid breed of walnut is developed which is more resistant toward droughts, insects, and disease. d) Price for walnuts decreases.

Answer 1

a) Increase in the price of rent increase the cost of production of walnuts and thus decreases production of walnuts. This causes leftward shift of supply curve as supply decreases due to change in factors other than the price of walnuts.

b) When government increases their subsidy then production of walnuts becomes cheaper for farmers and thus increases supply of walnuts in the market. This shift supply curve rightwards.

c) When new breed is developed which is more resistant to insects, diseases or drought then supply of walnuts increases in the market and shifts the supply curve rightwards.

d) Decrease in the price of walnuts decreases the quantity supplied of walnuts because this gives less profit to sellers. This causes downward movement of supply curve as supply decreases due to change in the price of good itself.