Question

In 2012, the price of corn was $8 a bushel. In 2014, a huge harvest caused the price to drop to about $4 a bushel because quantity demanded for the corn was less than the quantity supplied. What is the law of supply and how does it explain why farmers increased their production of corn? If quantity demanded for corn is much less than quantity supplied, is that a shortage or a surplus? Would the price of corn be above the equilibrium price or below? Why is the price dropping?

Answer 1

Solution-

The Law of Supply states that with all other factors being equal, as the price of goods or services increases, the quantity supplied will increase. In 2012 as the price of the corn was$8 per bushel, per the law of supply, the farmer’s production of corn increased. In 2014 the farmers increase of production created a surplus of corn, thus dropping the price. The price currently is below the equilibrium price, there is currently a surplus of corn than the demand for the goods because quantity demanded is less than quantity supplied. The price is falling as the demand is less than the supply of corn.