Longan are a tropical fruit, something like a cross between a lichee and a rambutan, grown commercially only in Thailand, South China, and Viet Nam [some people grow them in South Florida, but not commercially to my knowledge]. They grow on trees; there are many small, privately owned orchards of the trees. They spoil quickly, within a few days, after picking. They are very popular but quite expensive, regarded as a luxury. The alternative to eating them fresh as fruit is to dry them; dried, they are an ingredient in many traditional Chinese medicines, but the net return to farmers of dried longan is usually much lower than for fresh.

Consider the market for fresh longan in Bangkok [a very large city in Thailand]. For each of the following events [each numbered question independently on its own], sketch the supply and demand diagram for fresh longan, showing which curve(s) move how, and indicating the effect on equilibrium price and quantity exchanged by symbols P and Q with arrows for up or down, --- for no change, ? for uncertain.

1. Because of the financial crisis in SE Asia, many workers in Bangkok lose their jobs and the incomes of most people in Bangkok fall.

[Ignore numbers on the chart; remember, in competitive markets, Supply curve slope up to the right; Demand curves always slope down to the right -- if price goes down, people will want to buy more]

 If incomes go down, demand decreases -- at an unchanged price, people will want to buy fewer fresh longans. Demand decreasing, or "going down," means it moves IN to the LEFT, because we measure quantity along the horizontal axis. Supply has not changed, so the intersection of D and S must move in toward the origin -- it slides down the unchanged Supply curve, so both Price and Quantity must decrease, go down.
 
 

2. Bad weather in the longan growing regions result in much less fruit per tree.

This time, it is Supply that goes down (moves IN to the LEFT), Demand that is unchanged. So this time the intersection of S and D has to move UP the unchanged Demand curve to the left; Price must rise, Quantity must decrease.

3. Simultaneously, an insect infestation wipes out the crops of lichees and rambutan [substitutes for longan] in SE Asia, but a new pollination technique triples output of longan per tree.

Reduction in supply of the substitutes increases Demand (moves the curve OUT to the RIGHT) of fresh longans (because there are fewer lichees and rambutans, their prices go up, so at the same price for longans people will want to buy more); the larger ouput per tree also increases Supply (at the same price as before, farmers have more they want to sell), i.e. shifts it out to the right too. So the intersection of S and D has to move out to the right -- so the Quantity exchanged increases -- but we don't know whether it has gone up or down, i.e. we don't know whether the equilibrium price has gone up or down -- it depends how much the curves shifted, which we don't know (play with it; you can draw it so that the new equilibrium price is the same as before, higher, or lower; but however you draw it, if both curves shift to the right, the quantity will be bigger).
 
 
 
 

4. Simultaneously, a rumor spreads that a medicine based on dried longan can cure AIDS, and a sharp upturn in Thailand's exports increases most people's income in Bangkok.

Demand for dried longan will go up, so farmers will dry more longans and therefore sell less fresh; so Supply of fresh longans has decreased, moved IN to the LEFT; at the same time, increased incomes increases demand (opposite of 1.), i.e. at same price people want to buy more, Demand curve shifts OUT to RIGHT. Intersection of the two has to move UP, i.e. the equilibrium price must increase; but the quantity exchanged may increase, decrease, or stay the same, we don't know, because it depends how much the curves shift. Similar to number 3.