Question One
The supply and demand model makes use of the supply curve and demand curve to illustrate how equilibrium is determined in a competitive market. The wheat supply curve shows the quantities that farmers are willing to offer in the market at different prices. On the other hand, the wheat demand curve shows the amount of wheat that buyers are willing to purchase at different market prices. These curves are derived from their respective demand and supply schedules. The two curves can be plotted on the same graph to show the equilibrium price and quantity of wheat. The equilibrium price is the price of wheat that equates quantity of wheat demanded to the quantity supplied.
The demand curve is derived from the demand schedule.
Demand schedule
The quantity demanded increases if the price decreases and decrease when price increase.
Supply schedule
The Supply Curve
The Supply And Demand Model
This is formed when the two curves are drawn on one graph as shown below.
The brown curve is the demand curve while the blue curve is the supply curve. The coordinate at the point of intersection of the two curves shows the equilibrium price and quantity. From the illustration above the equilibrium price is 2.5 and equilibrium quantity is around 32.
Question two
One of the factors that affect the demand curve is the future expectations of the consumer. In the wheat market, the consumer expects a bumper harvest in future. This effect is likely to cause a shift in the demand curve. However, to understand how the demand curve shifts it is necessary to understand the implication of bumper harvest in the wheat market. The market supply of wheat increases when there is a bumper harvest. The farmers are willing to sell their output at a lower price so that consumers can increase their demand. Thus, consumers expect the price of wheat to fall in future due to the bumper harvest. The consumers will cut down their current demand and increase it in future when the price comes down. Thus, demand curve shifts to the left when consumers expect a future bumper harvest. This creates a new equilibrium point indicating low market price and quantity demanded. It should be noted that, this expectation does not affect the current supply curve because farmers must wait for wheat to mature for them to harvest and increase their market supply.
The New Equilibrium Point
The new equilibrium point is shown by the intersection of curve S and d2. The equilibrium price is 2.2 units and equilibrium quantity is 29 units.
