4) From October 1994 to march 1995, the price of cotton increased from $0.65 to over $1 per pound, the highest level since civil war. According to business week, ‘supplies have dwindled because of poor crops in china, india, and Pakistan. At the same time, consumers, underred by rising costs, have pumped up demand for cotton-rich casual clothing, as well as home furnishings made from cotton.’ (a) was this price increase due to shift in the demand curve for cotton, a shift in the supply curve for cotton, or both. (b)Did this price increase affect the supply curve for clothing? If so, how?
To determine whether the price increase in cotton was due to a shift in the demand curve, supply curve, or both, we need to analyze the factors mentioned in the given information.
(a) Factors that could potentially shift the demand curve for cotton include rising consumer demand for cotton-rich clothing and home furnishings made from cotton. If consumers are increasingly purchasing more cotton products and increasing their overall demand, the demand curve for cotton would shift to the right, resulting in higher prices.
On the other hand, factors that could shift the supply curve for cotton include poor crops in China, India, and Pakistan. If there are limited supplies due to poor harvests in these major producing countries, the supply curve for cotton would shift to the left, leading to higher prices.
Based on the information provided, it appears that both factors were at play. The poor crops in China, India, and Pakistan resulted in a decrease in the supply of cotton, shifting the supply curve to the left. Simultaneously, the rising consumer demand for cotton-rich clothing and home furnishings increased the demand for cotton, shifting the demand curve to the right. Both of these factors contributed to the price increase in cotton.
(b) The given information states that consumers, faced with rising costs, increased their demand for cotton-rich casual clothing and home furnishings made from cotton. This increased demand for cotton products would affect the supply curve for clothing, as manufacturers and retailers would need to procure more cotton to meet consumer demand. This would result in a rightward shift of the supply curve for clothing.
In summary, the price increase in cotton was likely due to both a shift in the demand curve and a shift in the supply curve for cotton. Additionally, this price increase would have affected the supply curve for clothing, leading to an increase in the quantity supplied to meet the higher consumer demand.