Question

2 Assume that you are consumer and buying a red meat from the butcher shop. It is estimated that 8 tons of red meat are sold at 40 TL per kg in Mersin per day and show the market equilibrium point. Firstly you noticed that subsidies paid by government for red meat production is increasing. Secondly you noticed that prices of white meat (chickhen) decreased noticeably. Thirdly change in demand is larger than the change in supply. Show the old and new equilibrium on the figure and explain how much quantity and prices are likely to change:

Answer 1

Ans.

Price A AS 40 AD P AD Q8 Quantity (In tons)

a) Subsidies on production of red meat leads to an increase in supply as cost of production has decreased. This shifts the supply curve for red meat rightwards from S to S'. This creates a surplus of red meat in thw market which lead to decrease in price level but increase in equilibrium quantity.

b) As price of white meat decreases, consumers substitute white meat in place for red meat, so, demand for red meat decreases which shifts the demand curve leftwards from D to D'. This leads to a further decrease in price level and equilibrium quantity of red meat also decreases.

c) As change in demand is larger than change in supply, so, the net affect on equilibrium quantity is that the quantity decreases at equilibrium but price level falls. So, after the above two affects, the equilibrium quantity of red meat decreases from 80 tons to Q' and price level falls from 40 TL per kg to P'.

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