Question

The lumber industry was hit hard by the downturn in housing starts in 2010 and 2011. Prices plunged from $290 per thousand board feet to less than $200 per thousand board feet. Many observers believed this price decrease was caused by the slowing of new home construction because of the glut of unsold homes on the market. Was this price decrease caused by a shift in the supply or demand curve? Depict a graph showing this situation.

Answer 1

Lumbers are used for furniture, wooden work while constructing houses. As construction of new houses reduced, there would be less demand of lumber in the market which will shift the demand curve to its left from AD to AD1 while supply curve remains the same resulting in reduction in price from P to P1 and output falling from Y to Y1. Thus we can say that reduction in price from $290 to $200 was due to shift in demand curve to its left.