Complete question reads;
You are watching a national news broadcast. It is reported that a typhoon is heading for the Washington coast and that it will likely destroy much of this year's apple crop. Your roommate says, "If there are going to be fewer apples available, I'll bet that apple prices will rise." If this information about the storm is publicly available so that all buyers and sellers in the apple market expect the price of apples to rise in the future, what will happen immediately to the supply and demand of apples and the equilibrium price and quantity of apples?
Answer:
- supply reduces immediately; demand increases immediately
- equilibrium price increases; quantity may increase or decrease.
Explanation:
Since we are told both sellers and buyers are aware of the information about the storm this is the likely happenings:
1. For Suppliers:
Because they expect the price of apples to rise in the near future, they would immediately lower the amount of apples they sell presently by reducing the supply, thus leading to a shift of the supply curve for apples to the left.
2. For Buyers:
With such knowledge, buyers would increase their demand for apples irrespective of the price now since they expect rise in prices. As a result the demand curve for apples shifts to the right.
3. Equilibrium quantity and price:
Overtime the price of apples would rise steadily, but the effect on the quantity depends on the extent to which the shifts in demand and supply occurs. If the shift of demand to the right is larger, then quantity increases; however if demand shifts to the right the same way supply shift to the left, then quantity remains unchanged; if the shift of supply to the left is larger, then quantity decreases.
