Question

British consumption of coffee has mushroomed over the years, leading to an increase in branded and independent cafes across the country and the rising popularity of pod and espresso machines for the kitchen. In fact, the rise in artisan coffee shops and home brewing systems has also increased expectations of quality, prompting chain stores to introduce specialist drinks to their menus.

Dreams Cafe is one such shop that has capitalized on this revolutionary coffee-drinking habit of millions of people. It is a small specialist coffee shop in Wolverhampton and since its inception, people are now willingly to pay £5 or more for a cappuccino or a latté.

Dreams Café sources it coffee beans from farmers in Brazil. Dreams Café is committed to ensuring coffee farmers are paid a fair price for their produce. As a result it operates under the fair trade banner which contributes to sustainable development by offering better trading conditions to, and securing the rights of, marginalized producers and workers especially in less developed countries.

In Brazil coffee is grown at very high altitudes on small farms that are exposed to the effects of the weather, dictated by global warning. In fact recent droughts in Brazil have affected the harvest of Coffee beans and are sure to impact the price of Coffee at Dreams Café.

The following data was collected from Dreams Café during 2016.

Table 1: The quantity demanded and Supplied of Dreams Cafe at a given price

Price per cup of coffee	£1.50	£2.50	£3.50	£4.50	£5.50	£6.50
Demand for Coffee/per hour	40	32	24	16	8	0
Supply of Coffee/hour	0	8	12	16	20	24

Table 2: The costs and Revenues for Dreams Cafe

Total Production (Cups of Coffee per hour)	Average Revenue (£)	Average cost (£)
1	105	110
2	95	90
3	90	80
4	85	75
5	80	74
6	75	76

Answer the following Questions

Discuss the specific factors that might affect the demand and supply of coffee for Dreams Café.                                                                                                                                                                 

Using the data in table 1 above:

Use a diagram to identify the equilibrium price and quantity for Dreams Coffee.                                                                                                                                                                 

Identify whether there is excess supply or demand at the price of £2.50.                                                                                                                                                                                                                                                                                                     

Explain the effect that the recent droughts in Brazil (mentioned in the article above) would have on the price of Coffee at Dreams Café.                                                                                                            

Dreams coffee is said to have an inelastic price elasticity of demand.

Explain what is meant by price elasticity of demand                                                   

Given that Dreams PED is inelastic, explain the impact of a temporary price reduction on the quantity demanded and overall profitability of Dreams.                                                            

Using the data in table 2 above:

Calculate total revenue, marginal revenue, total cost and marginal cost.                  

At what hourly output of cups of coffee with Dreams maximise profits?                 

How much profit will be made?                                                                                            

With the use of specific examples for Dreams Café, explain the terms fixed cost and variable cost.                                                                                                                                                           

Explain the term externality and outline any externalities, negative or positive, that might be generated by Dreams Café.                                                                                                                                   

Answer 1

I have answered all parts except last. If I have not then let me know. I will now answer last

Externality is impact of an activity which affects others and that effect is not reflected by market price. The positive externality could be developing reading habits among consumers if it offers magazines and books for free reading also. Other could be better health of individuals who consume coffee but which is not reflected by market price. Similarly negative health effects on health will not be captured by it.

A forget to answer first part. The specific factors which affect demand are price of coffee, income of consumers, presence of substitutes, economic situation i. E boom or depression, services offered by cafe, etc and specific factors that affect supply are price of coffee beans, demand conditions, timing of the day, output capacity of cafe etc