Question

A key skill in economics is the ability to use the theory of supply and demand to analyze specific markets. In this week’s discussion, you get a chance to demonstrate your ability to analyze the effects of several “shocks” to the market for coffee based on the scenerio. scenerio: Suppose the National Institutes of Health publishes a study finding that coffee drinking reduces the probability of getting colon cancer. How do you imagine this will affect the market for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.

Answer 1

If NIH says that coffee drinking reduces the risk of colon cancer, it will be perceived as a big positive by the coffee drinkers (the ones who demand coffee). This would lead to an increase in the demand for coffee, i.e., consumer will ask for more coffee at the same price. This will be shown as a rightward shift in the demand curve and will result in equilibrium price and quantity of coffee increasing from earlier.

In the graph below price is on vertical axis, the blue line is the supply curve and the orange line is the original demand curve. As a result of the NIH report, the demand curve shifts and the new demand curve is the grey line.