Question

Suppose extreme heat in California significantly reduces the supply of tomatoes this year. As a result, would you expect the total revenue from the sale of tomatoes to rise or fall? Explain with a supply-and-demand diagram.

Answer 1

Given that poor climatic conditions have reduced the supply of tomatoes this year. We expect that the supply of tomatoes should decrease and so the supply curve shifts to the left. The price level should increase and the quantity should reduce.

We presume that the supply is relatively inelastic because of limited quantity of tomatoes per season (they cannot be grown in factories expecting a surge in demand). Hence when an inelastic supply shifts left, price effect is smaller than quantity effect so revenue should decline. This is shown below