In 2001, an outbreak of hoof-and-mouth disease in Europe led to the burning of millions of cattle carcasses. What impact would you expect on the supply of cattle hides, hide prices, the supply of leather goods, and the price of leather goods? Explain.

The diagram below shows the changes in the price and quantity supplied due to a disease outbreak that led to the burning of cattle carcasses.

The initial supply curve ${S_H}^{\text{'}}$and demand curve $D_H$intersect at a price equal to P* and quantity Q*. The burning of cattle carcasses leads to a decrease in the supply and a backward shift in the supply curve ${S^{\text{'}}}_H$. The new equilibrium occurs at P’ and Q’.

Thus, the outbreak of the hoof-and-mouth disease reduced the number of fine quality cattle, and thus, reduced the supply of cattle hides to Q’.

As shown in the diagram shared before, the backward shift in the supply curve (from $S^{\text{'}}to{S^{\text{'}}}_H$) leads to a higher price of hides, denoted by P’. The original demand is higher than the new supply level, and thus, the price increases to reach an equilibrium. This shift in the supply curve leads to the contraction of demand at higher prices.

The leather goods use cattle hides as input. A decrease in the supply of cattle hides increases the cost of this input. Thus, the quantity supplied of leather goods decreases due to a higher cost of production resulting from a fall in cattle hides’ supply.

A negative supply shock in the leather goods industry due to increased costs (higher prices of cattle hides) increases leather goods’ prices. Reduced supply of leather goods leads to a backward shift in the supply curve and demand contraction at higher prices.