Question

1. Show the market for potatoes on a graph and show what will happen if there is a drought in Idaho (where a lot of potatoes are grown).

b. On another graph, show what will happen in the market for potatoes if there is a drought in China (where, I presume, a lot of rice is grown).

Note: I am assuming that there is one potato market and it is international. In other words, do not assume that there is a Chinese market and an American market, just one big market. The difference between a drought in China and in Idaho here is only (I'm assuming) that potatoes are grown in Idaho and rice is grown in China. (Assume that no potatoes are grown in China and no rice is grown in Idaho.) This might make you wonder what the drought in China has to do with the potato market. And that, of course, is the point of the question.

Answer 1

We assume that potatoes are grown in Idaho and rice are grown in China.

a) Drought in Idaho will reduce supply of potato and shift supply curve of potato to its left from AS to AS1. It will raise price from P to P1 and output level from Y to Y1.

b) Drought in China will reduce crop of rice which makes Chinese consumers dependent on potatoes from Idaho. It will raise imports from Idaho which reduce aggregate demand of China as aggregate demand and imports have negative relationship with each other.Leftward shift in demand curve will reduce price level from P to P1 and reduce output level from Y to Y1.