Question

Assume the following information for the demand and supply schedules for coffee.

Price	Quantity demanded (thousands of kg)	Quantity supplied (thousands of kg)
6	3	9
5	4	7
4	5	5
3	6	3
2	7	1

(a) Graph the corresponding demand and supply curves and identify the equilibrium price and quantity of coffee? (2)

(b) What do you mean by shortage and surplus? (2)

(c) At the price of $6, would there be a shortage or a surplus and how large would it be? (2)

(d) If the demand for coffee decreased by 3000 kg at every price, would the equilibrium price still remain the same? If yes why? If no, what would be new equilibrium price and would it be shortage or surplus at the old equilibrium price? (3)

(e) Using the original amounts of supply and demand, if the supply for coffee increased by 6000 kg at every price, would there be a shortage or a surplus and how much would it be at the price of $2? (3)

(f) Due to a storm coffee crop got destroyed. How would it impact the equilibrium price, quantity supplied, and quantity demanded? Explain graphically and present an event analysis. (5+5)

Answer 1

a)

b) A shortage means when the quantity supplied of good is lower than the quantity demanded which occurs when the market price is lower than the equilibrium level.

A surplus means when the quantity supplied of a good exceeds the quantity demanded which occurs when the market price is greater than the equilibrium level.

c) At P = 6

QD = 3000 QS = 9000

Surplus as QS exceeds QD = 9000-3000 = 6000

d) When QD decreases by 3000

P	QD	QS
6	0	9
5	1	7
4	2	5
3	3	3
2	4	1

Equilibrium price will decrease to P=3

At the old equilibrium price = 4, There would be a surplus of 5000-2000 = 3000 units