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Suppose that one of the following events occurs: (i) The price of wool rises. ...

First, please understand that an increase in the price of wool cannot affect either the supply of, or the demand for, wool. This is due to the technical definition of supply and demand.  The demand for wool is defined as the amount of wool that people are willing and able to buy at a given price.  The supply of wool is the amount that people are willing and able to produce at a given price. The important phrase here is “at a given price.”  Both supply and demand are curves that show an amount supplied or demanded at each possible price. Supply and demand only change when people are willing and able to buy or sell a different amount at the same price. When the price of a good (in this case, wool) changes,  all that happens is that we move along a given supply or demand curve.  The supply or demand curve does not actually move. Therefore, a change in the price of wool cannot change the supply of or demand for wool.


If the price of sweaters falls, the demand for wool will rise but the supply of wool will probably not change. (I am assuming here that sweaters are made of wool.)  When the price of sweaters falls, people will buy more sweaters (all other things being equal). When people buy more sweaters, that means that people who make sweaters will need to buy more wool to use to make those sweaters.  When this happens, the demand for wool will increase. 


There are five determinants of supply. If we look at them all, we will see that a change in the price of sweaters does not affect any of them. The first is resource prices. If the price of sweaters falls, the price of the resources needed to make wool do not change so the supply of wool does not change.  The second is production technology.  The price of sweaters does not affect the technology available for producing wool. The third is the prices of substitutes or complements.  Sweaters are not a substitute or complement for wool.  The fourth is sellers’ expectations.  If the price of sweaters goes down, that should not cause wool producers to believe that the price of wool will change so they should not change how much they are producing right now.  Finally, there is the number of sellers.  A decrease in the price of sweaters should not lead to a change in how many people want to raise sheep for wool.  For these reasons, a decrease in the price of sweaters should not lead to a change in the supply of wool.

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