The Price Increase And Demand Model

2215 Words Jan 10th, 2015 9 Pages
Question 1
The dramatic price increase of garlic in China in 2009 can be explained by the supply and demand model. Perfect competition is evident in the agricultural industry, as there are many producers who act as price-takers.
In the previous year, low prices discouraged farmers from continuing to plant garlic crops. Many farmers turned to growing produce that they believed would be more profitable and hence, garlic supplies declined. The supply curve shifted to the left (S_1 to S_2 below), causing a slight increase in the equilibrium price (P_1 to P_2) and large decrease in equilibrium quantity (Q_1 to Q_2) of garlic.
In China, garlic has long been considered to have medicinal benefits. The swine flu epidemic of 2009 caused tastes to shift towards garlic and significantly increased the quantity demanded. The demand curve shifted to the right (D_1 to D_2), causing an increase in both the equilibrium price (P_2 to P_3) and quantity (Q_2 to Q_3) of garlic.
Since land set aside for garlic crops had been halved in the previous year, farmers could not respond quickly to the price increase by returning to garlic production. This meant that in the short-term, the price elasticity of supply was relatively inelastic, and so the outward shift in the demand curve increased equilibrium price substantially more than quantity.
Chinese investors stockpiled wholesale supplies in prediction that the price would continue to rise. The supply curve shifted to the left (S_2 to S_3),…

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