Micro Demand and Supply

1) Draw the demand and supply curves for wheat in South Australia, which show the market before and after the mouse plague.

Wheat produced in South Australia

The graph above is the demand and supply curves of wheat in South Australia. Before the mouse plague the supply curve is S1. However, the supply of wheat decreases to S2 after the mouse plague.

Firstly, the mouse plague made a huge damage of wheat in South Australia. Therefore, the supply fell to S2. In addition, the expectation of farmers to make profit from wheat in South Australia has decreased to a relatively low level. So farmer might quit from this industry and get into another option. It also contributes to the decrease of wheat in South Australia. The movement from E1 (equilibrium) to E2 causes the quantity of wheat supplied to decrease (Q1 to Q2) and results in the increasing price for each unit of wheat sold (P1 to P2).

2) What impact will the cost of insecticides have on the market price of wheat and the quantity of wheat produced?

Wheat produced in Australia

The same can be said for the impact of the new price of insecticides on the market price of wheat. Logically, this new price will be set to all across the country, not only in South Australia. Farmers from other states will be frightened by the case of mouse plague occurred in SA and to prevent that to happen, they will purchase more insecticides even though the price of it has risen.

Cost of insecticides goes into the category of cost of inputs. Therefore, due to the increased cost, supply of wheat will decrease, and thus the supply curve will shift to the left from S1 to S2. The change in equilibrium position (from E1 to E2) will result in higher price per output produced (P1 to P2) and also decreasing quantity of wheat produced (from Q1 to Q2).

3) Suppose farmers in Victoria are not affected by the mouse plague. Show what will happen in the market for their wheat

In Victoria, supply for this coming market will...