Question

2. Describe how price is determined in this industry.  Illustrate it graphically.

In 1996 there was a major increase in the supply of fresh potatoes, which drove potato prices from $8 per 100 pounds in 1995 to between $1.50 and $2 per 100 pounds in 1996, a price that was one-third the cost of production. Based on the substantial profits they had earned with their 1995 crops, farmers increased production in 1996, resulting in a 48.8-billion-pound crop, the largest in U.S. history.

Answer 1

Above Curve:- Demand Curve

Equilibrium is the state of market when quantity demanded is equal to quantity supplied. It is a state of rest in the market.

Due to excess production of the crops, the equlibrium of the market disturbed. In the year 1996, the quantity supplied is more than quantity demanded. So, due to the excess of quantity supplied over quantity demanded. In order to attain equilibrium, the price will start falling and the market will attain equilibrium when the quantity demanded and supplied are equal again.

In the above graph, at price $8, the market was demanding 12.2 billion pound (48.8/4). But when price falls to 25% i.e. $2, the quantity supplied will be increased by 4 times i.e. 48.8 billion pound.

Every point on the curve will give us the quantity demanded at certain price.