Question

Describe the price adjustment process that would be set in motion in the bottled water market if a wide-spread drought were to hit the United States

Answer 1

If a drought were to hit the United States, the demand for water would rise substantially. Naturally, the rise in demand would result in a much higher price than before, as the demand curve shifts to the right. The price and quantity have both increased as a result. This is the scenario in the first time period, i.e. the time immediately when the drought hits US.

With time, however, suppliers would increase the supply of bottled water to reap the benefits of increase in price levels. This would result in an increase the supply of bottled water (the supply curve shifts upwards to the right). As a result, the price of bottled water comes down to the original equilibrium level. However, the equilibrium quantity is greater than what it used to be.

These are the price adjustment mechanisms that take place in the bottled water market.