Question

ASSIGNMENT - Use internet or printed publications to identify examples of Increase in Supply or Decrease in Supply

Address the following:

the initial equilibrium

identify the shock (Increase in Supply or Decrease in Supply)

the resulting equilibrium

compare resulting equilibrium prices and quantities to the previously existing ones

Answer 1

If we consider the example of coffee market to determine the change is supply that is given in this link : http://www.freeeconhelp.com/2011/09/shifts-in-supply-and-demand-example.html

Now, if we consider the case that coffee plant are getting killed because of a blight , then it will certainly decrease the production of coffee, and eventually the supply would fall. The demand will remain costant.Therefore this supply shock will increase the price with a decrease in quantity supply. We can explain this events by the following diagram:

Inititally, demand(D) and Supply (S₁) intersects at initial equilibrium E₁, which determines the price of Coffe at P₁and quantity supply of coffee at Q_1. Now a supply shock occurs because of plants are getting killed by blight. It lowers the production as well as supply of coffee, which shifts the demand curve leftward from S₁ to S₂. As, there will be no change in demand for coffee, the new and resulting equilibrium will be at E₂. The supply shock increases the price of coffee from P₁ to P₂ and lowers the quantity supply of coffee from Q₁ to Q₂.