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. (You can draw the graph, take a picture and attach it here. Please do *not* take a picture of your hand-written answer, it is much easier for your marker to read typed text)

Answer 1

Supply curve of wine is positively slopped curve indicating the direct relationship between quantity supplied and price.

When a price rise is expected, producers of wine would reduce the Supply of wine at present. They do so in order to supply more at incresed price.

This can be explained with the help of the following diagram.

SS is the initial Supply curve in the market. Now due to the expectation of high prices in future, ptoducers lower present Supply. A decline in quantity supplied shifts the Supply curve to left from SS to S1S1.