Economics: Supply and Demand

Case Assignment

Write a 4- to 5-page essay that addresses the following FOUR questions on the market for coffee. (For this case, keep it simple; don't worry about different brands, whether it is store-bought or prepared at home, etc.)

1 . Explain what happens to price and quantity of coffee when the following events occur (you do not need to analyze the event itself but rather focus on the effect on supply and demand of coffee):

a A scientific study shows that coffee helps reduce weight gain.

b Coffee plants from major producing countries are affected by drought. (Fun fact: a coffee bean is a misnomer for the seed of a coffee plant.)

c The price of tea decreases.

d In order to protect growers that have better working conditions for workers (referred to as Fair Trade), a price floor on coffee is implemented.

2 . Suppose Mr. Washington drinks 3 cups of coffee every day no matter what the price. What kind of elasticity does it have?

3 . Suppose that when the price of coffee increases by 40%, the percentage change in quantity demanded by consumer is reduced by 10%. Calculate the elasticity.

4 . Based on your answer to Question 3, what happens to total revenue when the price of coffee is increased? Why?

Some helpful suggestions on completing the assignment:

For each event, you must specify how it affects demand, quantity demanded, supply, or quantity supplied. It is also important to demonstrate how the change will affect the market demand or supply curve. Also, be sure to state any assumption you are making regarding the relationship of the event and coffee.

Here is an example of the best way to answer question #1 above:

Event:

Price of donut decreases.

Assume that donuts are a complement for coffee. If donuts are cheaper, then the consumer will increase quantity demanded of donuts. If consumers buy more donuts, then there will be a increased demand for coffee because it is its complement. This event causes a shift of the demand curve to the right. The shift will cause price and quantity of coffee to increase.

Here is also some helpful information on how to address the elasticity questions:

Inelastic goods (goods in which consumers are less responsive to changes in price):

e < |-1|

Elastic goods (goods in which consumers are more responsive to changes in price):

e > |-1|

In this course, we use the absolute value of elasticity. The price elasticity of demand is always calculated as a negative value due to the law of demand (inverse relationship between price and quantity).

Assignment Expectations

Use concepts from the modular background readings as well as any good-quality resources you can find. Be sure to cite all sources within the text and provide a reference list at the end of the paper.

Length: 4–5 pages double-spaced and typed.

The following items will be assessed in particular:

· Your ability to understand an application of supply and demand.

· Some in-text references to the modular background material (APA formatting not required).

· The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings.

Background information:

http://www.web-books.com/eLibrary/NC/B0/B63/TOC.html

http://www.web-books.com/eLibrary/NC/B0/B63/TOC.html

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