Question

In 2001 an outbreak of foot-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact do you think this had on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? Support your answers to these questions using Demand, Supply, and Market Equilibrium theory.

Answer 1

In all graphs, D0 and S0 represent initial demand and supply curves, intersecting at point A. Initial equilibrium price is P0 and quantity is Q0.

(1) Cattle hide market

Burning of cattle carcasses will decrease market supply of cattle hide. Decrease in supply shifts supply curve leftward, increasing price and decreasing quantity. In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(2) Leather goods market

Higher price of cattle hide, an input to leather goods industry, will decrease market supply of leather goods. Decrease in supply shifts supply curve leftward, increasing price and decreasing quantity. In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.