Question

Consider the market for coffee.

a.) Draw a supply and demand curve for the market for coffee. Label the equilibrium price and quantity.

b.) What will happen to the original equilibrium price of coffee if the price of tea increases? Explain. Show the effect of this change in a new graph of the market.

c.) What will happen to the original equilibrium price of coffee if new conservation laws in Brazil force some coffee plantations to close? Explain. Show the effect of this change in a new graph of the market.

Answer 1

a.) The market for coffee is drawn below where price is P0 and quantity is Q0.

b.) In case the price of tea increases, its consumers will demand fewer units of tea so there is a decline in quantity demanded. Its consumers would consider coffee as a substitute beverage so demand for coffee increases. This shifts the demand curve to the right, raising the price to P1 and quantity to Q1.  

c.) With new conservation laws forcing some coffee plantations to close, the supply is affected. The supply curve shifts to the left reflecting the reduction in number of firms and so the production. This raises the price to P1 and reduces the quantity to Q1