Question

Discuss how price changes in each market encourage producers of red and white wine to alter their production, leading to a re-allocation of resources to their highest valued use.

Answer 1

If there is reallocation of resources to their highest valued use, this will increase the productivity of the resources and hence the production will increase. The increase in the production will result in an increase in supply and hence the price of the product will come down.

Since the price of the product has come down, so it will discourage the producers and hence they will decrease the production of wine. This is because it is well known that at lower prices the producers will be less willing to supply the products.

This happens because we know generally that if the price of a product increases the producers will increase supply and if price decreases the producers will decrease the supply.