Question

Assignment: Supply and Demand for Coffee

A key skill in economics is the ability to use the theory of supply and demand to analyse specific markets. In this week’s assignment, you get a chance to demonstrate your ability to analyse the effects of several "shocks" on the market for coffee. Answer all parts of each of the scenarios below.
Scenario 1: Suppose that, as part of an international trade agreement, the U.S. government reduces the tariff on imported coffee. Will this affect the supply or demand for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.
Scenario 2: Suppose the National Institutes of Health publishes a study finding that coffee drinking reduces the probability of getting colon cancer. How do you imagine this will affect the market for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.
Scenario 3: Combine parts 1 and 2. Suppose that the U.S. government reduces the tariff on imported coffee, and a reputable study is published indicating that coffee drinkers have lower rates of colon cancer. What will the combined impact be on the equilibrium price and quantity of coffee? Explain your reasoning and show it graphically. Make sure you think this through carefully!

Answer 1

Reduced tariffs on coffee imports and published health benefits increase both the supply and demand for coffee, leading to a higher equilibrium quantity. The equilibrium price could either decrease or increase based on whether the supply increase is greater than the demand increase or vice versa.

Step-by-step explanation:

When analyzing the impact of reduced tariffs on imported coffee and the release of a study indicating health benefits of coffee consumption, we observe two main effects on the supply and demand for coffee. First, reducing tariffs will increase the supply of coffee, as it becomes more cost-effective for foreign producers to export to the U.S. market, shifting the supply curve to the right. Secondly, the publication of a study suggesting coffee drinkers have lower rates of colon cancer would likely increase the demand for coffee, as consumers perceive it as a healthier choice, thus shifting the demand curve to the right.

Graphically, the new equilibrium point would be where the increased supply meets the increased demand. The result is an increase in the equilibrium quantity of coffee sold due to both effects. As for the equilibrium price, it may either decrease or increase depending on the magnitude of the respective shifts in supply and demand. If the increase in supply outweighs the increase in demand, the price could decrease. Conversely, if the demand increases more than the supply, the price could rise.