Question

Suppose that a heat wave is expected to hit Italy in a few weeks. It is expected to destroy much of the wineries there, causing the price of wine to increase in the future. Show on a graph and explain how you would expect this to affect the supply curve for wine today.

Marking rubrics.

• Clarity of Exposition
• Correctly drawn today's Supply Curve (before the heat wave announcement)
• Correctly drawn today's Supply Curve (after the heat wave announcement)
• Detailed Explanation (Justify Answer)
• The graph is well drawn, well labelled and legible.

Answer 1

When producers expected price of wine to increase in future, they decrease current production so that they can sell more in future at higher price than today's price. As a result, current market supply of wind decreases. Supply curve shifts to left, increasing current price and decreasing current quantity of wine.

In following graph, price (P) and quantity (Q) of wine are shown at vertical and horizontal axes. D0 and S0 are initial demand and supply curves of wine, intersecting at point A with equilibrium price P0 and quantity Q0.

When supply decreases, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.