Suppose that you are investigating the market for wheat
.
The price of corn
,
a substitute good, has decreased. Which of the following would best describe the market reaction to this event?
Part 2
A.
The supply of corn
increases since farmers
must produce more corn
to make up for the price decrease.
B.
The demand for wheat
decreases, creating a shortage and forcing the price of wheat
to increase.
C.
The supply of wheat
decreases since the price of corn
decreases.
D.
The demand for wheat
decreases, which creates a surplus of wheat
,
causing the price of wheat
to decrease.
The correct answer is D. The decrease in the price of corn, a substitute good for wheat, would lead to a decrease in the demand for wheat. This decrease in demand would create a surplus of wheat in the market, causing the price of wheat to decrease.
To determine the market reaction to the decrease in price of corn, we need to understand the relationship between corn and wheat as substitute goods. As substitutes, an increase in the price of corn generally leads to an increase in demand for wheat, and a decrease in the price of corn usually leads to a decrease in demand for wheat.
Let's evaluate each option:
A. The supply of corn increases since farmers must produce more corn to make up for the price decrease.
Explanation: This option refers to the supply of corn, but it does not directly address the impact on the demand or supply of wheat. Therefore, this option is not the best description of the market reaction.
B. The demand for wheat decreases, creating a shortage and forcing the price of wheat to increase.
Explanation: This option suggests that the decrease in the price of corn leads to a decrease in the demand for wheat. It states that this decrease in demand creates a shortage of wheat and causes the price of wheat to increase. As mentioned earlier, a decrease in the price of corn leads to a decrease in demand for wheat, making this option a plausible description of the market reaction. However, we need to evaluate the remaining options before choosing the best one.
C. The supply of wheat decreases since the price of corn decreases.
Explanation: This option suggests that the decrease in the price of corn leads to a decrease in the supply of wheat. However, there is no direct relationship between the price of corn and the supply of wheat. In fact, a decrease in the price of corn generally leads to a decrease in the demand for wheat since they are substitutes, not the supply. Therefore, this option is not the best description of the market reaction.
D. The demand for wheat decreases, which creates a surplus of wheat, causing the price of wheat to decrease.
Explanation: This option suggests that the decrease in the price of corn leads to a decrease in the demand for wheat. It states that this decrease in demand results in a surplus of wheat and causes the price of wheat to decrease. This option aligns with the relationship between corn and wheat as substitutes, where a decrease in the price of corn leads to a decrease in the demand for wheat. Therefore, this option is a plausible description of the market reaction.
Considering the analysis, the best description of the market reaction to the decrease in the price of corn is option D: The demand for wheat decreases, which creates a surplus of wheat, causing the price of wheat to decrease.
The correct answer is B. The demand for wheat decreases, creating a shortage and forcing the price of wheat to increase.
When the price of a substitute good, such as corn in this case, decreases, consumers tend to switch their preference from the relatively more expensive good (wheat) to the cheaper alternative (corn). As a result, the demand for wheat decreases.
When the demand for a good decreases, it creates a shortage in the market, as the quantity demanded is now less than the quantity supplied. In order to balance the market, the price of wheat will need to increase to incentivize producers to supply more wheat and to reduce consumer demand.
Therefore, option B is the most accurate description of the market reaction to the decrease in the price of corn.