Suppose new research shows that soy milk and other products derived from soybeans provide more health benefits than previously thought. At the same time, drought conditions result in extensive damage to the soybean crop. What will be the combined impact of these two factors on the equilibrium price and quantity of soybeans

Quantity will decrease, but the effect on price is indeterminate.

Price will increase, but the effect on quantity is indeterminate.

Price will decrease, but the effect on quantity is indeterminate.

Quantity will increase, but the effect on price is indeterminate.

Question

Deborah Walter

Business

7 January, 10:13

Suppose new research shows that soy milk and other products derived from soybeans provide more health benefits than previously thought. At the same time, drought conditions result in extensive damage to the soybean crop. What will be the combined impact of these two factors on the equilibrium price and quantity of soybeans

Quantity will decrease, but the effect on price is indeterminate.

Price will increase, but the effect on quantity is indeterminate.

Price will decrease, but the effect on quantity is indeterminate.

Quantity will increase, but the effect on price is indeterminate.

+3

Answers (1)

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Meyers · Answer 1

The answer is:

Since soybean is a highly regulated agricultural commodity, the supply and demand curve will shift and the new equilibrium quantity of soybean will decrease but the price will increase. If the shift is too large then the USDA might act and increase the supply to lower the price.

Explanation:

The supply of soybean will be lower due to the severe drought, so the equilibrium quantity should be lower. That by itself would make the price of soybean rise (that's how all crops work, lower supply equals higher price). Agricultural products are regulated commodities in the US, and when a drought happens the prices of the crops always get higher.

When a severe drought happens the whole supply and demand curve shifts. The demand side of the curve is very inelastic but the real change in quantities will be caused by the drought.

The price could even get higher if the demand grew due to the scientific study that proved that soybean was good for you. That could pressure the price so high that the government would need to intervene the market and start selling stored soybean. The US government has huge deposits and silos of soybean, wheat and corn that they use to put a ceiling and a floor price to that commodities. If the government takes action the supply of soybeans could increase to satisfy the growing demand and lower the price a little. Since agricultural commodities are highly regulated in the US both the price and quantities may vary but ultimately the USDA has the final word.