Question

3.3 Equilibriums - Simultaneous Shifts Question Consider the following hypothetical story on the Canadian beef market. Agriculture and Agri-Food Canada (AAFC) recently reported the average price of a pound of beef dropped from $5 in 2016 to $4 from 2017. However, the AAFC noted the quantity of beef consumed rose from 9 million pounds in 2016 to 12 million pounds in 2017. The AAFC attributes the changes in price and quantity to the following impacts: • Health Canada's update of its Food Guide now recommends lean beef as the healthiest source of protein. This is in contrast to the original Food Guide from the 1970s where beef was considered too high in fat to be a healthy food choice. • A rebound in the size of the Canadian cattle herd. Canadian ranchers have increased the size of their herds in anticipation of selling more beef to both Canadian and foreign consumers. a) Using a supply and demand graph, explain what happened to the supply and demand for Canadian beef as a result of the impacts the AAFC has suggested. Please ensure to incorporate the AAFC data into your explanation as well as the labeling and drawing of your graph when explaining the overall effect of the supply and demand shocks on price and quantity (Hint: you don't have to draw the graph to scale!). b) With the types of shocks that occurred in this hypothetical example, are the effects on price and quantity unambiguous, compared to the original equilibrium, than what was specified (i.e. a price decrease and quantity increase)? Please carefully explain your answer and note that no graph is required.

Answer 1

(a) When there is a health update of beef being a healthiest source of protein in contrast to beef being too high in fat to be a healthy source, the demand for beef increases from DEMAND to DEMAND1 as in the diagram below. On the other hand, when Canadian ranchers have increased their size of their herds in anticipation of selling more beef to both Canadian and foreign consumers, the supply of beef increases from SUPPLY to SUPPLY1.

When there is an increase in demand, the demand curve shifts to the right and when there is an increase in supply the supply curve shifts to the right. But, since the price has fallen at the end, we see that the demand has increased less compared to the increase in supply (if demand would have increased more than the supply, the price would have risen at the end).

PRICE (3) DEMAND1 SUPPLY DEMAND 0 1 2 3 4 5 6 7 8 9 10 11 12 QUANTITY

(b) With the types of the shocks that occurred in this hypothetical example, the effects on the price and quantity were unambiguous since compared to the original equilibrium that was specified since the demand has increased less than the increase in quantity. So, there was a price decrease and quantity increase.