Question

Consider the market for oranges in the US. Suppose we begin with an equilibrium in this market, where quantity produced is equal to quantity demanded, which is equal to 5 million tons of oranges. Further suppose the price of a pound of oranges is $2.50. a. Illustrate this equilibrium by using supply and demand curves. Don't forget to label the axes, show the equilibrium quantity and the equilibrium price. (5 pts) b. Now suppose a tropical storm hits Florida destroying 1 million tons of oranges in citrus farms. What happens to the supply curve? What happens to the equilibrium price? Do we have a shortage or a surplus of oranges in the wake of the tropical storm? Show by using your plot from part a. (5 pts) c. How does the market for oranges transition to its new equilibrium? In the new equilibrium, is the price of oranges higher or lower than the initial equilibrium price, $2.50? Is the new quantity demanded higher or lower than 5 million tons? (5 pts) d. Now suppose the same thing happens in Venezuela, where there is central planning. A tropical storm hits the citrus farms in Venezuela. Citrus farmers would like to adjust their prices following the storm but they have to wait until the next meeting of the Central Planning Committee, since the Central Planning Committee is the only one who can change the prices of oranges. Can the Venezuelan people enjoy as many oranges as they would like? Can the market for oranges in Venezuela transition to a new equilibrium on its own? (10 pts)

Answer 1

A) As shown in the diagram, the quantity supplied = Quantity demanded at Q= 5 mn tonnes and P = $2.5

​​​​​B) since the tropical syorm destroys 1 mn tonnes of production, therefore there will be a reduction in supply at the given price levels. To show this the supply curve will shift to the left so that at each price now a lesser quantity ( less by 1 mn) is supplied. This means that the equilibrium price will now increase. At the original price there will be a shortage of oranges because of excess demand that drives the prices of oranges up. This is also shown in the diagram.

Price ($) supply 9.S . - - demand Quantity of oranges Cin mn tonnes)

- supply cwue after storm y supply T ts Shortage i Excess Demand demand Quantity of oranges can mn tonnes)

C) As there is a reduction in the supply of oranges , the prices in the market will take time to adjust and hence at the same price, there is excessive demand of oranges which the supply is unable to meet. Due to this shortage , the price of oranges grafually start increasing and as it happens , more and more consumers will be driven out of the market because now oranges will become unaffordable for them at the increasing price. The equilibrium will be obtained finally where the new suppky curve intersects the demand curve at a higher price . As shown in the diagram in part b) the new Equilibrium price is higher than P=$2.5 and the new Equilibrium quantity will also be lower than 5 mn tonnes because the price increase reduces the demand.

D) Since the central planning committee will only decide the price of oranges, the economy of Venezuela will not transition to a new higher price equilibrium on its own. The supply curve will shift to the left here as well, there will be a shortage created at the equilibrium price of $2.5 , so the Venezuelan people will not have as much oranges as they would like. But this shortage will not increase the prices in the market because here the central planning committee decides the prices and not the forces of demand and supply.