Question

Consider the following editorial that appeared in the Wall Street Journal in the late 70’s, after a significant freeze in Latin America destroyed a number of coffee plants:

Coffee prices, it seems, are coming down again, after hitting a record high of $4.42 last year. As Agriculture Department economist, who had predicted $5 a pound coffee this year, says he “underestimated the power of the consumer movement.” Perhaps, or maybe, as with so many economists these days, he simply forgot his freshman economics, which has nothing to do with “movements.” The coffee market is behaving the way the basic textbook says the market behaves: Prices go up, demand falls, and prices come down.

1. Suppose coffee had started out at an equilibrium price of $1 per pound prior to the freeze. Draw a demand/supply graph and show the initial equilibrium. Label all axis, curves, and equilibrium price and quantity
   
   
2. Show graphically the effects of the freeze in your graph from part a. Let the new equilibrium price = $4.42. Does either the demand or supply change (that is, actually move)? Why or why not? Which direction?
   
   
3. Based on your answers in parts a and b above, critique the WSJ’s editorial. What’s wrong with their analysis?

Answer 1

Answer:-

Coffee market starts at the equilibrium wherever E shows the equilibrium and therefore the equilibrium worth is $1 per pound and amount is Q0 before the freeze. Demand slopes down and provide slopes upward.

A freeze leave harmful effects within the offer by destroying the low crop. as a result of there's a amendment in non worth issue, we have a tendency to expertise a (leftward) shift within the offer curve. this can be shown by the new offer curve S'S' that is currently at a lower amount provided per dollar. The new equilibrium is at F wherever the new equilibrium worth is $4.42 and amount is Q1.

This Associate in Nursingalysis shows that it's the provision amendment and an actual amendment in leftward direction. The analysis is wrong as a result of it assumes a wrong preposition that costs go up, demand falls, and costs come back down. It ignores the provision impact and explains that once worth is high, demand shifts leftwards and this reduces the worth that is inaccurate.