Economic analysis Essay Example | Topics and Well Written Essays - 1000 words

Economic analysis - Essay Example In normal circumstances, keeping other things constant (ceteris paribus), as the demand rises (the supply is held constant), the price of the good also increases. This is because as the demand for a good rises, the willingness and the ability of the buyers to buy rises. As a result, buyers are willing to buy more, and hence the price of the good rises. This can be shown in the diagram that is drawn below. From Figure 2.1 it can be seen that as demand rises (due to some exogenous variable), the demand curve shifts to the right (from AB to CD). The supply is fixed and so the new equilibrium is F instead of E that was initially the equilibrium. Since the supply is fixed it can be seen that the prices have risen from P1 to P2, such that P1 In the article, Erica Olsen, the marketing specialist for North Dakota Wheat Commission states that the prices of durum throughout the year 2009 have not been changed. In fact they have remained in a range of $4 to $ 4.20, so that the average price is $ 4.10.2 She states that the demand for durum has increased worldwide and so has increased the exports of America. The estimated number of exports was reported as 838000 bushels in the year 2009.3 Normally, this increased number of exports may lead to a shortage of durum in the domestic country. Consequently, the prices may increase more as the supply falls to the left (there is a shortage). This phenomenon can be seen in the figure below. In the figure, the demand is already high. With an increase in exports the supply in the domestic market should fall. (The supply curve should shift from UX to YZ). The equilibrium should shift to G from E. Hence the price should increase more, this time to P3 where P3> P2. However this is not what was observed in