Question

For the scenario listed below, is there a shift in the long-run aggregate supply curve, the short-run aggregate supply curve, both, or neither? Explain your answer

Q: Hot weather leads to lower crop yields in the Midwest.

Answer 1

A drought leads to a shift in the supply curve of wheat, resulting in a lower equilibrium quantity and a higher equilibrium price. Changes in price do not shift supply or demand curves, but rather cause movements along the curves.

Step-by-step explanation:

Lee's first step is correct: that is, a drought shifts back the supply curve of wheat and leads to a prediction of a lower equilibrium quantity and a higher equilibrium price. This corresponds to a movement along the original demand curve (Do), from Eo to E₁. The rest of Lee's argument is wrong, because it mixes up shifts in supply with quantity supplied, and shifts in demand with quantity demanded. A higher or lower price never shifts the supply curve, as suggested by the shift in supply from S₁ to S₂. Instead, a price change leads to a movement along a given supply curve.

Similarly, a higher or lower price never shifts a demand curve, as suggested in the shift from Do to D₁. Instead, a price change leads to a movement along a given demand curve. Remember, a change in the price of a good never causes the demand or supply curve for that good to shift.