Market equilibrium can be defined as a price where the quantity demanded equals the quantity supplied . Thus it is the point of intersection of the demand and supply curve of the product. In figure 1 the initial equilibrium price of wheat is depicted as P0 and quantity as Q0. The news says that due to hot weather conditions prevailing for a longer time than usual the production of wheat has come down.
The fall in supply of wheat is depicted in figure 1 as a leftward shift of the supply curve from S0 to S1. As the supple curve shifts leftwards there is excess demand at the price level P0 as supply is deficient. This brings up the price of wheat. The increase in the price of wheat leads to increased in supply to a certain extent along the supply curve until the equilibrium is restored at a higher price level P1 and lower quantity Q1.
The rise in the price of wheat will have a impact on the demand for other cereals that are substitutes for wheat. The demand for another cereal say, barley will increase as the price of wheat rises. This is depicted in figure 2. The initial equilibrium price and quantity is P0 and Q0 respectively. As the price of wheat rises the demand for barley increases resulting in a rightward shift in the demand curve for barley from D0 to D1. There is excess demand at the initial price P0. The price shoots up until the new equilibrium is reached at a higher price P1 and a higher quantity Q1.
Figure 1
P S1
S0
D0
Q1 Q0 Q
Figure 2 S0
P
P1
P0
D1
D0
Q0 Q1 Q
References
Pindyck, R. & Rubinfield, D., 2009. Microeconomics. 7th ed. s.l.:Prentice Hall.
