Question

Suppose we are analyzing the market for coffee. For each of the events given below, state he demand curve and/or the supply curve would shift, provide reasons for the whether t shift, and indicate the effect on the equilibrium price and equilibrium quantity. (12 marks)

a. The price of tea, a substitute for coffee, falls.
b. The price of coffee beans decreases
c. A better method of harvesting coffee beans is introduced.
d. Consumer income falls because of a recession, and coffee is considered a normal g
e. Farmers expect the price of coffee beans to increase next month.
f. Currently, the price of coffee is $2.50 per cup above equilibrium.

Answer 1

a. The price of tea, a substitute for coffee, falls.

demand curve will shift to the left, decreasing the equilibrium quantity and decreasing equilibrium price of coffee.

b. The price of coffee beans decreases

the supply curve will shift to the right, increasing total quantity supplied and decreasing equilibrium price.

c. A better method of harvesting coffee beans is introduced.

the supply curve will shift to the right, increasing total quantity supplied and decreasing equilibrium price.

d. Consumer income falls because of a recession, and coffee is considered a normal g

demand curve will shift to the left, decreasing the equilibrium quantity and decreasing equilibrium price of coffee.

e. Farmers expect the price of coffee beans to increase next month.

supply curve will shift to the left, since coffee bean farmers will not sell their products until the price rises. This will cause a shortage in the supply of coffee beans and a shortage int he supply of coffee, resulting in a higher equilibrium price.

f. Currently, the price of coffee is $2.50 per cup above equilibrium.

the demand curve will shift to the left, decreasing quantity demanded and decreasing equilibrium price