Question

Consider the market for imported strawberries (from Canada) in the USA (characterized by negatively sloped demand and

positively sloped supply) in conjunction with the following two events：

(1) Consider the market for imported strawberries (from Canada) in the USA (characterized by negatively sloped demand and positively sloped supply) in conjunction with the following two events: Event I Strawberry farms in Canada have been multiplying; Event II: Incomes in the USA are on the rise. How do the two events affect, initially and simultaneously, Demand, Supply, Pe and Qe?

Answer 1

Increase in number of strawberry firms in Canada will increase the production of strawberry, increasing its market supply. The supply curve will shift rightward, decreasing price and increasing quantity. A simultaneous increase in income in USA will increase the demand for strawberries. The demand curve will shift rightward, increasing price and increasing quantity. The net effect is a definite increase in quantity. But price will increase, decrease or remain the same on basis of whether the rightward shift in demand curve is higher than, lower than or equal to the magnitude of rightward shift in supply curve.

In following graph, D0 & S0 are initial demand & supply curves intersecting at point A with initial price P0 & quantity Q0. As D0 shifts right to D1 and S0 shifts rightward to S1, they intersect at point B with higher quantity Q1. In graph, rightward shift in demand curve is higher than the magnitude of rightward shift in supply curve, so price is higher at P1.