Question

Suppose that speculators bought large quantities of paper during a time of low paper prices. Later, poor weather resulted in decreased average tree growth in the species that supply pulp for paper. This caused a leftward shift in supply and higher prices for paper pulp, an input in paper production. Subsequently paper prices rose and quantity fell as the paper supply curve also shifted to the left. The supply curve on the graph depicts the current, reduced supply of paper. Suppose that speculators release their stored quantity of paper when paper prices increase. Move the supply curve to reflect this action, then use the shape to show the increase or decrease in value created by the speculators. Note that an image of the supply curve will remain in place to show the supply curve before the speculators act. Supply Price Demand Quantity

Answer 1

S1 is the current supply curve, which suggests reduced paper quality. Note that when paper prices increase speculators release their accumulated amount of paper. This will be shown by the rise in the paper supply and by the supply curve S2. The value produced by the speculators is increased by the supply. This is illustrated by the shaded rectangle.

si S2