Studyledge

Market Equilibrium and Price Changes: Question 9

Syllabus 2.4, 2.5

Structured 8 marks

A wholesale fruit market sells crates of tomatoes. An unusually favourable growing season produces a bumper harvest, significantly lowering the average cost of growing and harvesting tomatoes per crate, while the price of a crate of tomatoes itself has not changed. The table below shows the quantity of tomato crates demanded each day, together with the quantity supplied at each price both before the bumper harvest ("original quantity supplied") and after it ("new quantity supplied").

Price ($) Quantity demanded (crates per day) Original quantity supplied (crates per day) New quantity supplied (crates per day)
20 140 60 100
25 120 80 120
30 100 100 140
35 80 120 160
40 60 140 180

(a) State the original equilibrium price and equilibrium quantity of tomato crates, before the bumper harvest. [2]

(b) Explain why the fall in the cost of growing and harvesting tomatoes causes a shift of the supply curve for tomatoes rather than a movement along it, and state the direction of this shift. [3]

(c) Using the "new quantity supplied" column, state the new equilibrium price and equilibrium quantity of tomato crates after the bumper harvest, and describe the overall change in equilibrium price and equilibrium quantity caused by the fall in growing costs. [3]

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Worked solution

Part (a): Finding the original equilibrium

Equilibrium occurs where quantity demanded equals original quantity supplied. Checking the table:

PriceQdOriginal Qs
$2014060
$2512080
$30100100
$3580120
$4060140

Only at $30 do the two quantities match, both at 100 crates per day. This is the original equilibrium price and quantity, before the bumper harvest.

Part (b): Why this is a shift, not a movement

The price of a tomato crate itself has not changed anywhere in this scenario. What has changed is the average cost of growing and harvesting tomatoes, following an unusually favourable growing season. A change in production costs is a non-price determinant of supply, so it shifts the whole supply curve; it does not simply move growers to a different point on the same curve.

Reasoning through the effect:

  1. Growing and harvesting tomatoes becomes cheaper, so the cost of producing each crate falls.
  2. At any given selling price, tomato crates are now more profitable to supply than before.
  3. Growers are therefore willing and able to supply more crates at every possible price.

This means the supply curve for tomatoes shifts to the right: supply has increased. This matches the table. At every price row, the “new quantity supplied” is higher than the “original quantity supplied”.

Part (c): The new equilibrium after the shift

Equilibrium after the bumper harvest occurs where quantity demanded equals the new quantity supplied. Checking the table:

PriceQdNew Qs
$20140100
$25120120
$30100140
$3580160
$4060180

Only at $25 do the two quantities match, both at 120 crates per day. This is the new equilibrium.

Comparing the two equilibria:

  • Equilibrium price falls, from $30 to $25.
  • Equilibrium quantity rises, from 100 to 120 crates per day.

This is exactly what is expected from a rightward shift of the supply curve, with the demand curve unchanged: price falls, and quantity rises, since more tomato crates are now supplied at every price and buyers extend their purchases down the (unchanged) demand curve to a point of higher quantity.

Final answers

  • (a) Original equilibrium: price == $30, quantity == 100 crates per day.
  • (b) The supply curve shifts right (supply increases), because the fall in the cost of growing and harvesting tomatoes makes crates more profitable to supply at every price. This is a shift, since the tomato’s own price never changed.
  • (c) New equilibrium: price == $25, quantity == 120 crates per day. Overall, equilibrium price falls and equilibrium quantity rises.