Supply and demand: Markets, Prices and price
setting
1. Explain what happens to price and quantity of
coffee when the following events occur:
a. A scientific study shows that coffee contains
some antioxidants.
b. Coffee plants from major producing countries
are affected by drought. (fun fact: a coffee
bean is a misnomer for the seed of a coffee
plant)
c. The price of donuts increases.
d. In order to protect growers that have better
working conditions for workers (referred to as
Fair Trade), a price floor on coffee is
implemented.
For each event, you must specify how it effects
either demand, quantity demanded, supply, or
quantity demanded. It is also important to
demonstrate how the change will affect the
market demand or supply curve. Also, be sure to
state any assumption you are making regarding
the relationship of the event and coffee.
e.g. Price of tea decrease.
Assume that tea is a substitute to coffee. If
tea is cheaper, then the consumer will increase
quantity demanded of tea. If consumers buy more
tea, then there will be a decreased demand for
coffee. This event causes a shift of the demand
curve to the left. The shift will cause price
and quantity of coffee to decrease.
2. Suppose Mr. Dash drinks 2 cups of coffee
everyday no matter what the price. What kind of
elasticity does it have?
3. Suppose that when the price of coffee
increases by 30%, the percentage change in
quantity demanded by consumer is reduced by 10%.
Calculate the elasticity.
4. Based on your answer to #3, What happens to
total revenue when the price of coffee is
increased. Why?
Recall from the powerpoint presentation:
Inelastic goods (goods in which consumers are
less responsive to changes in price): e < 1
Elastic goods (goods in which consumers are more
responsive to changes in price): e >1
In this course, we use the absolute value of
elasticity. It is always a calculated value of
-1 due to the law of demand.
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