Term Paper Help|Custom Principles of Microeconomics.
When drinking coffee becomes an unhealthy habit based on the fact that the amount of cholesterol is increased from unfiltered coffee, the prices for coffee would fall, and the people will start drinking less coffee. The demand for coffee will decrease, while the supply still remains the same. This would move the price balance to the lower level.
In the short term period, the supply-demand curve will cause the decrease in demand for coffee. The prices would increase, and the supply would not change. But in this case the increase of prices doubles the negative effect caused by the scientific information. Therefore, in order to balance the prices, the production companies will definitely lower the supply in order to decrease coffee prices. Otherwise they would suffer from major financial loss.
The tea being a substitute for coffee would serve as a major competitor which can win from such situation. When coffee is considered unhealthy, tea substitutes coffee, and the demand for tea rises, while the prices fall dramatically.
The second situation refers to the coffee plants from major coffee production countries that are affected by drought. This is the reverse movement on the supply-demand curve. In this case, there will be less coffee produced, and therefore less coffee supply. The demand will still be the same as the habits of the people will not change. Many consumers won’t even know about this fact. Therefore, the coffee plants will only have to raise the prices for coffee as there will be less amount of the product on the market.
The situation on the tea market in this case would be very different. The drought causing less amount of coffee on the market and lower prices for coffee might push the customers to drink less tea, because they will substitute tea with coffee for fewer prices. Tea production companies will need to lower the prices for tea in order to meet competition.
The third situation is the decrease of the donuts’ prices. Due to the fact that donuts are the supplement for coffee, and the lower prices will cause more demand for donuts than before, coffee drinking demand will also be affected. People who eat donuts will need something to drink, and in this case the demand for coffee will grow dramatically without the actual price changes. The supply would probably remain the same.
In the short term period, such tendency has positive implications. However, in the long term period, there is a problem that the demand for coffee would cause a shift of price balance, and the coffee prices would increase. This might be also the result of the donuts becoming a part of coffee lifestyle and a powerful habit due to lower prices.
Donuts can be also taken with tea. That is why, the only strategy that can be wisely used by the tea production companies in this case is lowering the prices for tea together with donuts and thus demonstrating the connection between the two products. This might not save the situation, but it may facilitate the potential for more tea demand.
When the specific measures are taken by producers that affect the prices, both supply and demand change. In the case with the price floor which is the result of the measures taken to protect the growers, the price floor limits the growth of prices which therefore limits the changes in the supply-demand curve. In this case there will be a limit for price which is out of the balance, and therefore to balance the price at the price floor, either supply or demand will have to change.
Such conditions cause the shift of the supply graph to the right which decreases the supply of coffee in order to meet the demand at the price floor. Or vice versa, the demand curve will move to the left in order to meet the lower supply at the price floor.
The price floor in general would not affect that tea as a supplement, the demand and supply of tea would not be affected significantly. The changes in the supply-demand curve for coffee are only the results of the price floor which changes the balance of prices. However, the tea production as well as demand for tea would not change significantly.
Mr Dash drinks two cups of coffee every day. The prices may be lower or higher, but Mr Dash is inelastic to the prices of coffee. Accoding to Bouman, elasticity takes place when the changes in prices do not affect the demand for the product. Therefore, Mr Dash has perfectly inelastic demand for coffee. The fact that no matter how the price increases or decreases, the amount of the product consumed does not change means that the level of demand remains the same all the time. This reveals the stable demand curve which is perfectly inelastic: changes in prices by one point do not change the quantity of product consumed at all.
The increase of the price of coffee by 30% and the reduction of consumer demand for 10% will cause the following elasticity:
Price elasticity of demand = 30% / 10% = 3.
Therefore, the product has price elasticity at the level of 3. It also means that the product is elastic, and the proportional change in price for the product changes the demand three times more.
The total revenue is also linked to the elasticity of demand. In case when the prices are changing by 30% and the demand decreases, the quantity of the product consumed will be less by 30%.
The revenue when the price of coffee is increased together with the decrease of demand will be growing until a certain level when the elasticity will change, and the product becomes unit elastic. From this point, the changes in prices will also cause the changes in demand; however, the revenue will be reduced. The point when the price elasticity of demand equals 1, the revenue stops growing and starts to decrease when the price elasticity of demand for coffee is less than 1. This means that the growth of the price for coffee from the certain point do not result in revenue growth.
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