Question

3 Consider the market for Alberta beef. For each of the following events, what happens to the equilibrium price and quantity of beef? Show how you obtained your answer by drawing a demand/supply diagram. Put your answers in the table below, indicating what curve shifts (Demand or Supply) and in what direction éê or if no curve shifts (NC). Indicate the resulting effect on priceéê and quantityéê

a.) Producers introduce a new hormone supplement that increases the weight of cattle with no change in feed.
b) The government announces that red meat consumption leads to heart attacks.
c) The price of beef rises.
d) A disease in chicken farms causes much of Alberta’s chicken supply to be destroyed. Chicken is a substitute for beef. e) Red wine, consumed with beef, increases in price.

f) The price of cattle feed soars, as drought affects the prairies.

Answer 1

3. a. If producers introduce a new hormone supplement that increases the weight of cattle with no change in feed, then the supplement will help producers to supply more beef, as a result of which the supply curve of beef shifts rightward from S1 to S2 and the demand curve for beef remains unchanged. At the new equilibrium point B where the new supply curve S2 intersects demand curve D, the equilibrium price of beef falls from P1 to P2 and the equilibrium quantity of beef rises from Q1 to Q2.

b. As the government announces that red meat consumption leads to heart attacks, then consumers will consume lower amount of beef and as a result of which the demand curve for beef shifts leftward from D1 to D2 and the supply curve of beef remains unchanged. Now at the new equilibrium where the new demand curve D2 intersects supply curve S, the new equilibrium price of beef falls from P1 to P2 and the equilibrium quantity of beef falls from Q1 to Q2.

c. The price of beef is an endogenous variable, it is not determined from the outside of the model, as a result of which as the price of beef rises, there will be no shift of demand or supply curves, instead there will be an upward movement along the demand curve, and the quantity of beef will falls from Q1 to Q2 as the price of beef rises from P1 to P2.

d. As  a disease in chicken farms causes much of Alberta’s chicken supply to be destroyed and as Chicken is a substitute for beef, thus as supply of chicken is destroyed due to the disease in chicken farms, then consumers of chicken will switch from chicken consumption to beef consumption and hence the demand for beef increases and the demand curve of beef will shift rightward from D1 to D2 and at the new equilibrium point B where the new demand curve D2 intersects the supply curve S, the equilibrium price of beef rises from P1 to P2 and the equilibrium quantity of beef rises from Q1 to Q2.

e. As red wine, consumed with beef, hence beef and red wine are perfect complement of each other. As the price of wine increases, people will consume less amount of wine and will demand for less beef as wine and beef have to be consumed together. Hence the demand curve for beef will shift leftward from D1 to D2 and at the new equilibrium point B, the equilibrium quantity of beef falls from Q1 to Q2 and the equilibrium price of beef falls from P1 to P2.

f.  As drought affects the prairies the price of cattle feed soars and producers will have to pay more to raise cattles and as a result of which they will decrease the number of cattles and as a result of which, the supply of beef falls and the supply curve of beef shifts leftward from S1 to S2 and the demand curve remains unchanged and at the new equilibrium point B, the equilibrium price of beef rises from P1 to P2 and the equilibrium quantity of beef falls from Q1 to Q2.