1. How will the equilibrium price and quantity in the market for WHEAT be affect

Question

1. How will the equilibrium price and quantity in the market for WHEAT be affected when farmers growing soybeans experience a decrease in the price of soybeans?

The big thing that confuses me is if wheat and soybeans are substitute or complimentary products. If they are substitutes, wont that mean a decrease in demand for wheat since people will be demand more soy beans? if they are compliments, will that mean an increase demand? ORRRR is the supply affected for some reason???

We have to do rough sketches for this, so feel free to include a rough graph with quantity on the x axis and price on the y axis. (supply is an increasing line and demand is a decreasing line)

Explanation / Answer

Substitute means both goods give similar utility to you, hence, you can exchange your consumption the good, for instance, pepsi and coke, bread and rice, tea and coffee. Complimentary means you consume both goods together, for instance, bread and butter, tea and sugar, left shoes and right shoes. Do you consume wheat and soybeans together? No. That's why they are NOT complimentary goods! (that's how my teacher drilled in the concept into our heads) Looking at SUPPLY point of view, When price of soybeans decreases, the quantity of wheat will INCREASE, because farmers could gain more profit from it, thus they will use their land to cultivate more wheat instead of soybeans. On the other hand, when you analyze DEMAND, when price of soybean decreases, demand for soybean will INCREASE because of the lower price, while this will decrease demand for wheat because they are substitutes. the resulting equilibrium will depend on the elasticity of the good. Hope that helps! :)

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