Question

Let corn denote per capita consumption of corn in bushels at the county level, let price be the price per bushel of corn, let income denote per capita county income, and let rainf all be inches of rainfall during the last corn-growing season. The following simultaneous equations model imposes the equilibrium condition that supply equals demand:

corn = α1 price + β1 income + u1

corn = α2 price + β2 rainfall + γ2 rainfall 2 + u2 .

Which is the supply equation, and which is the demand equation? Explain.

Answer 1

corn = α1 price + β1 income + u1 <=== Demand equation

corn = α2 price + β2 rainfall + γ2 rainfall 2 + u2 <=== Supply equation.

Step-by-step explanation:

Given:

corn = α1 price + β1 income + u1 …………………………………………. (1)

corn = α2 price + β2 rainfall + γ2 rainfall 2 + u2 …………………….. (2)

From the above, equation (1) is the demand equation while equation (2) the supply equation.

Equation (1) is the demand equation because parts of the factors determining the demand for a product are the price of the product itself and the income of the buyers. However, rainfall is NOT one of the factors determining the demand for a product.

Equation (2) is the supply equation because parts of the factors determining the supply a product are the price of the product itself and other factors such as rainfall for corn in this case. However, income of the buyers is NOT one of the factors determining the supply for a product.