In: Economics
Q11 - Draw hypothetical supply and demand curves for tea. (You do not need to include this in the assignment.) For each of the following examples either supply or demand will be affected.
In each example say whether supply or demand is affected, and how they are affected, meaning are they increased or decreased.
Once you identify which curve changes and how it changes, explain or describe how the equilibrium price and equilibrium quantity will be affected.
Example: Consumers have more income and tea is a normal good. (This is a change in demand. It will increase demand or shift it to the right. This will lead to an increase in the equilibrium quantity and an increase in the equilibrium price.)
a. Severe weather wreaks havoc with the tea crop.
A severe weather wreaks havoc with the tea crop. As such the supply of tea will be affected. As severe weather has ruined the tea crops,there is a decrease in supply. Here, the supply of tea crops has decreased because of a change in factor other than the own price of the tea. Here, change in supply of tea has not resulted from change in price of tea. Hence, the supply curve of tea will shift to the left indicating that less tea is being supplied at the same price. This is Change in supply. As supply of tea has reduced, with demand remaining the same, the equilibrium price of tea will increase. As supply has reduced has demand for tea has not changed, buyers will offer higher price in an attempt to get the tea and suppliers on the other hand, seeing low availability of tea, will ask for higher prices. Both the cases lead to an increase in the equilibrium price for tea. As quantity supplied of tea has decreased, the equilibrium quantity of tea will decrease.
In the above diagram, S and D are the initial supply and demand curves respectively. E is the initial equilibrium point where demand and supply curve intersect. P is the initial equilibrium price and Q is the initial equilibrium output of tea. A decrease in the supply of tea as a result of severe weather will cause the supply curve to shift to the left. The new supply curve is S1. The new equilibrium point is A where new supply curve S1 and original demand curve D intersect. The equilibrium price will increase to P1 and equilibrium output will reduce to Q1.