Question

Suppose you have a favorite local coffee shop that raises the price of coffee from $2 to $2.2 for medium size. With the supply and demand framework, explain why the prices rise.

Answer 1

There are two possible reason behind the rise in prices.

1. Increase in demand

Suppose coffee shop became famous and all of a sudden demand increases. Demand curve will shift right ward. Which will cause the increase in price. Whether there will be increase in quantity or not will totally depends upon how the demand curve shifts right ward.

2. Decrease in supply.

Suppose material cost went up it will cause the supply curve shift leftward. Which again leads to increase in price. It will also leads to decrease in quantity.