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?

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

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

(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?  

(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?

(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.

Answer 1

a) At equilibrium, QD=QS

Equilibrium price = 4

Equilibrium quantity = 5000

b) A shortage occurs when quantity demanded exceeds quantity supplied at a given price level

A surplus occurs when quantity supplied exceeds quantity demanded at a given price level.

c) At P=6, QD = 3000 and QS = 9000

So, there is a surplus of 9000-3000 = 6000 units

d) No, it will change

Price	Quantity demanded (thousands of kg)	Quantity supplied (thousands of kg)
6	0	9
5	1	7
4	2	5
3	3	3
2	4	1

New equilibrium price = 3

New equilibrium quantity = 3000

At the old equilibrium price, QD = 2000 and QS = 5000 so there would be a surplus of 5000-2000 = 3000 units