Fig. 1 shows a tomato grower's supply curve. A new irrigation system reduces the grower's water costs for every crate produced. The market demand curve does...
Question 1 Report
Fig. 1 shows a tomato grower's supply curve. A new irrigation system reduces the grower's water costs for every crate produced. The market demand curve does not change.
(a) Which supply curve is likely to apply after the irrigation system is installed? [1]
(b) State the likely change in equilibrium price. [1]
(c) Explain why lower water costs change supply. [2]
Answer Details
(a) After installation, supply is shown by the curve labelled S2. It is the outward, rightward supply curve, indicating more crates supplied at each price. [1]
(b) The equilibrium price is likely to fall. Greater supply meets unchanged demand at a lower price. [1]
(c) Water is an input in tomato production. Lower water costs lower the cost of producing each crate and raise profit at any given selling price. The grower is therefore willing and able to supply more crates at every price, which is an increase in supply rather than simply a movement along the original supply curve. [2]
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