Question

1. Use the supply and demand model to show how each of the following affects the market for coffee, ceteris paribus. Make a diagram to show the change in price and quantity for each of the following cases.

a. The price of tea decreases.

b. Coffee growers form a union, which increases their wages.

c. Caffeine is shown to prevent Alzheimer’s disease.

d. The expected price of coffee increases.

Answer 1

In each graph, (P) and quantity (Q) are depicted along vertical and horizontal axes. D0 & S0 are initial demand and supply curves intersecting at point A with initial equilibrium price P0 and quantity Q0.

(a) A fall in price of tea, a substitute, will decrease the demand for coffee, shifting its demand curve leftward, decreasing both price and quantity. In following graph, D0 shifts left to D1, intersecting S0 at point B with lower price P1 and lower quantity Q1.

(b) Higher wage rate will increase the cost of inputs, which will decrease supply. The supply curve will shift left, increasing price and decreasing quantity. In following graph, S0 shifts left to S1, intersecting D0 at point B with higher price P1 and lower quantity Q1.

(c) Favorable health report on consumption will increase the demand for coffee, shifting its demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.

(d) Increase in expected price will increase the current demand for coffee, shifting its demand curve rightward, increasing both price and quantity. In following graph, D0 shifts right to D1, intersecting S0 at point B with higher price P1 and higher quantity Q1.