Asked whether a drought raises or lowers the equilibrium price and quantity of wheat, Lee reasons: a drought reduces supply, so shift the supply curve back from S₀ to S₁ (Shift 1); the equilibrium moves from E₀ to E₁, quantity lower and price higher. Then a higher price makes farmers more willing to supply, so supply shifts right from S₁ to S₂ (Shift 2) and the equilibrium moves to E₂. The higher price also reduces demand, so demand shifts back from D₀ to D₁ (Shift 3) and the equilibrium moves to E₃.
Answer. Shift 1 is correct: the drought shifts supply back, and the move from E₀ to E₁ is a movement along the original demand curve D₀. The rest 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 (Shift 2) or the demand curve (Shift 3); a price change is a movement along a given curve. A change in the price of a good never causes the demand or supply curve for that good to shift.
Think about the timeline: what happens first, what is cause and what is effect. Turn Shift 2 and Shift 3 off to see the correct analysis on its own.
| Step | Claim | Verdict |
|---|---|---|
| Shift 1 | Drought reduces supply: S₀ to S₁ | Correct |
| Shift 2 | Higher price shifts supply right: S₁ to S₂ | Wrong |
| Shift 3 | Higher price shifts demand back: D₀ to D₁ | Wrong |
A price change moves the market along a curve; it does not shift the curve.