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Markets, Prices, Revenue and Elasticity of Coffee

1. Explain what happens to price and quantity of coffee when the following events occur:
a. An advertising campaign highlights scientific studies that find drinking coffee can help 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.

For each event, you must specify how it effects either demand, quantity demanded, supply, or quantity demanded. 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.

e.g. Price of donuts decrease.

Assume that cookies are a complement to coffee. If donuts are cheaper, then the consumer will increase quantity demanded of donuts. If consumers buy more donuts, then there will be a need for more coffee to go with the donuts so the demand for coffee will increase. This event causes a shift of the demand curve to the right. The shift will cause price and quantity of coffee to increase.

2. What are the major determinants of elasticity in your own words?

3. What type of elasticity (elastic, inelastic, zero, etc.) do you think coffee has based on the major determinants of elasticity. Explain your reasoning.

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

Recall from the powerpoint presentation:

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. It is always a calculated value of -1 due to the law of demand.

Rittenberg L. and T. Tregarthen (2009). Chapter 3: Demand and Supply Principles of Microeconomic Analysis. FlatworldKnowledge.com.

Rittenberg L. and T. Tregarthen (2009). Chapter 5: Elasticity and A Measure of Response Sections 1 and 2 Principles of Microeconomic Analysis. FlatworldKnowledge.com.

Solution Preview

1. Explain what happens to price and quantity of coffee when the following events occur:

a. An advertising campaign highlights scientific studies that find drinking coffee can help reduce weight gain.

With this information, people will be attracted to drinking coffee. Meaning, the quantity of demand for coffee will increase. With the increase in demand, coffee producers will be willing to sell more coffee. There will be a situation where the increase in the demand for coffee will overtake the supply of coffee. In this situation, price per unit of coffee will increase.

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.) Drought will adversely affect the supply of coffee. The will be a drastic reduction in the supply for coffee. The price per unit of coffee will increase due ...

Solution Summary

The solution concerns on price, quantity, and revenue and elasticity of coffee given different scenarios.

$2.19