Question

An increase in the wage paid to grape pickers will cause the a. demand curve for grapes to shift to the right, resulting in higher prices for grapes. b. demand curve for grapes to shift to the left, resulting in lower prices for grapes. c. supply curve for grapes to shift to the left, resulting in lower prices for grapes. d. supply curve for grapes to shift to the left, resulting in higher prices for grapes.

Short answer

The correct answer is d. The increase in the wage paid to grape pickers will cause the supply curve for grapes to shift to the left, resulting in higher prices for grapes.

Step-by-step solution

Analyze the effect of the wage increase on demand and supply

First, we need to determine whether the increase in the wage affects the demand or supply of grapes. Since the wage is a production cost, it is related to the supply side, not the demand side.

Determine the effect of the wage increase on the supply curve

Higher wages for grape pickers will increase the cost of production for grape suppliers. When the production cost increases, grape suppliers will find it less profitable to supply grapes at the same price, so they will reduce their supply at that price level. This implies that the supply curve for grapes will shift to the left.

Determine the effect of the supply shift on the price of grapes

When the supply curve shifts to the left, it means that there is lower supply for grapes at each price level. To restore equilibrium in the market, the prices will have to increase (higher prices will lead to a decrease in demand, thereby balancing the reduced supply).

Match the analysis to one of the given options

Following steps 1 to 3, we determined that the wage increase will cause the supply curve for grapes to shift to the left, resulting in higher prices for grapes. This matches option 'd'. Therefore, the correct answer is: d. supply curve for grapes to shift to the left, resulting in higher prices for grapes.

Key concepts

Supply Curve Shift

The supply curve in economics represents the relationship between the price of a good and the quantity supplied by producers. When the supply curve shifts, it indicates a change in supply levels irrespective of the current price.

A leftward shift of the supply curve, as seen in the exercise with grape pickers receiving higher wages, signifies a decrease in supply. Higher production costs, such as increased wages, make it more expensive to produce the same amount of goods. As a result, producers are willing to supply less at every price point, leading to a shifted supply curve.

A rightward shift, on the other hand, would suggest an increase in supply, potentially due to factors such as technological improvements or a decrease in production costs. Understanding this dynamic is crucial for analyzing market behaviors and predicting how changes in costs influence overall production.

Production Costs

Production costs are the expenses associated with creating a product or providing a service. These costs include materials, labor, energy, and overhead, among others. Labor, being a significant portion of production costs, directly affects the supply curve.

When the wages of grape pickers increase, as posited in our exercise, the total cost of producing grapes also rises. For companies to maintain profitability, they must adjust their supply; most often, this means reducing the quantity they supply at existing prices.

This reduction in supply due to increased production costs is not limited to agriculture but applies to various industries, impacting the prices and availability of myriad products and services in the market.

Market Equilibrium

Market equilibrium occurs when the quantity supplied equals the quantity demanded at a given price level. Economists depict this on a graph where the supply and demand curves intersect. It represents a stable situation where there is no tendency for the market price to change unless the supply or demand curves shift.

In our example with grape production, an increase in production costs—specifically wages—causes a leftward shift in the supply curve. As a consequence, the new equilibrium point is reached at a higher price and a lower quantity, illustrating the new balance between supply and demand in the market. When either curve shifts, the equilibrium price and quantity are disrupted, and market forces work to establish a new equilibrium.

Price Determination

Price determination is the process by which prices of goods and services are set within the market framework, grounded on the forces of supply and demand. As demonstrated in our scenario, supply changes due to higher wages lead to adjustments in prices to reach a new equilibrium.

The intersection of the supply and demand curves represents the price at which consumers are willing to buy the same quantity that producers are willing to sell. Thus, when the equilibrium is distorted by a shift in the supply curve, the market reacts accordingly. A reduced supply typically necessitates an increase in price to balance the reduced availability of the product, which is precisely what the grape growers must do in the exercise example. Through such adjustments, markets are able to self-regulate and attain new points of equilibrium over time.