Question

In this essay you will be asked to reflect the following issues using the supply and demand model.

1. There are two important inputs in the production of lattes: coffee beans and labor from workers at the coffee shop.
   • Workers need to make a decision about how much time to spend working and how much time to spend doing other things. What factors affect the decision of a worker and how do these things affect the price of lattes?
   • Suppose a drought strikes the major coffee growing regions of Brazil. Describe the effect of the drought on the price and quantity of lattes in the context of the supply and demand model.
2. Now consider the local coffee market more broadly. Explain how the output decision made by a particular coffee shop differs under each of the four market structures: competition, monopoly, oligopoly, and monopolistic competition.

Answer 1

a) Major factors that affect a workers decision are -

1) Work environment

2) Organisation's approach

3) Organization's goal

4) Employee wellness

5) Wages and pay

If all the above-mentioned criteria are fulfilled an employee tends to work for more hours as he/she is satisfied with his/her job and vice versa. It will have a direct impact on the price of lattes. As if an employee A works for 8 hours a day for say $10 which comes out to be more number of hours as compared to employee B who works for 6 hours a day for $ 10. Employee A would be preferred by an employer as he/she will cost less which will further lead to a reduction in the price of lattes.

b) If a drought strikes the major coffee-growing regions of Brazil. It will have an adverse effect on the price and quantity of lattes in the context of the supply and demand model. As due to damage of the crops, the quantity supplied will be less whereas there will be no shortage in the quantity demanded which will inturn hype the price of coffee. And gradually higher prices of coffee will bring down the quantity demand to strike a market equilibrium at the level of quantity supply. Hence. revising the price once again.

c) The output decision made by a particular coffee shop differs under each of the four market structures as follows:

1) Monopolistic competition, a kind of flawed rivalry to such an extent that numerous makers sell items or administrations that are separated from each other (for example by marking or quality) and subsequently are not immaculate substitutes. In monopolistic rivalry, a firm takes the costs charged by its adversaries as given and disregards the effect of its own costs on the costs of others. This market structure exists when there are numerous dealers who endeavour to appear to be unique in relation to each other. Output is driven by demand and supply force.

2) Oligopoly, in which a market is controlled by few firms that together control most of the piece of the overall industry. Production is determined by producers understanding.

3) Monopoly, where there is just a single supplier of an item or administration. Hence, production is driven by the manufacturer will.

4) Perfect competition, a hypothetical market structure that highlights low obstructions to section, indistinguishable items with no separation, a boundless number of makers and customers. The output is driven by demand forces.