Chapter 14: Problem 522

Suppose the market price for corn drops from $\$ 1,00$ per bushel to $\$ .75$ per bushel. In reaction to this, the farmers decide to sell one third less corn to the market. Has the supply of corn to the market decrease?

Short Answer

Expert verified

Yes, the supply of corn to the market has decreased. The farmers' decision to sell one third less corn, despite not being directly influenced by the price drop, has effectively reduced the volume of corn they are willing and able to sell. This results in a decreased supply of corn on the market at the new price of $.75$ per bushel compared to the old price of $1.00$ per bushel.

Step by step solution

Understand the Situation

Farmers used to sell corn at a price of $1.00 per bushel, but the market price has dropped to $.75 per bushel. In reaction to this, they have decided to sell one third less corn to the market. It's important to understand that the farmers' decision to sell less wasn't necessarily influenced by the lower price — it’s stated directly in the exercise that it was a conscious choice they made.

Define Demand and Supply

The quantity of a certain goods that buyers are willing and able to purchase at different prices is referred to as 'demand'. Conversely, 'supply' is the quantity of a certain product that sellers (like our farmers) are willing and able to sell at different prices.

Analyze the Farmers' Decision

By deciding to sell one third less corn, the farmers have effectively reduced the volume of corn that they are 'willing and able' to sell. Despite the decreased market price, they are not willing to sell their corn at this lower price.

Identify the Change in Supply

Normally, the supply of a product would change as a direct result of changes in its price. But in this case, the supply was changed not because of the price drop, but due to the conscious decision of the farmers.

Conclude

The decision of the farmers to sell one third less corn has led to a decrease in the supply of corn. They are essentially supplying less corn to the market at the new price of $.75 per bushel compared to what they used to supply at the old price of $1.00 per bushel. Hence, despite the reason not being the price drop, the end result is the same: the supply of corn on the market has indeed decreased.