Supply and Demand for Coffee - Coursework Example

Macro & Micro economics   submitted PPF CURVE AND FOREIGN INVESTING/SUPPLY AND DEMAND FOR COFFEE/SUPPLY AND DEMAND DEFINITION FOR 10 DIFFERENT SCENARIOS Scenario One The PPF curve shows the economic choices a country can make about production given scarce resources, a given technology, and a given quantity of inputs. Assume you are a developing country, producing food and clothing at maximum capacity. What could happen when foreign investors start investing in your country? Production priority frontier (PPF) is a curve that shows the combination of two or more goods that could be produced using available resources (Tutor2u). Possibilities of things to happen when an investor comes into the country are shown in Fig. 1. Fig. 1. Production Possibility Frontier Let us assume that Fig. 1 is the production possibility frontier of a developing economy where point X production is at maximum capacity given the scarce resources, a given technology and a given quantity of inputs. At point X, resources are not managed efficiently. Points A, B, C are possibility frontiers of an investment and presents a combination of clothing and food production of the country. At any point of combination, an investor may invest in the country. Discuss what type of foreign investments would be best for the economy’s PPF. What are the opportunity costs of these decisions? In Fig. 1, Point A is the best type of foreign investment for the developing economy. It gives clothing and food equal allocation of resources. When there is no increase in productive resources, increasing production of clothing would decrease the production of food, or vice versa. Points along the curve show the trade-off between clothing and food production. The sacrifice in the production of food is called the opportunity cost. “Opportunity cost is the cost of an alternative that must be foregone in order to pursue an action” (Investopedia). This means when the production of clothing is increased, it will entail losing the opportunity to produce some amount of food. What will happen to private and public choices as the economy grows. Support your discussion of these issues and consequences using at least 2 graphs. Going back to Fig. 1, Public and private choices will be accepting foreign investments. There will be improvement in the productivity because of increase of capital that results to introduction of new technology and resources FIG 2. In Fig. 2, For purposes of explanation, let us assign a production quantity for food and clothing. The straight line represents the PPF that is a constant opportunity costs between two products. Increasing production of B from 60 to 90 will mean giving up 90 units of A, Scenario Two In the early part of the last decade, there was an overproduction of coffee. The price dropped so low that producers' costs were higher than the market price. The reason this happened was that market prices became high before this, and the supply of coffee increased substantially. In the meantime, demand for coffee and everything else remained the same. Coffee prices came down again, at first overshooting the former equilibrium price, throwing the coffee market into confusion. In the meantime, gourmet coffee houses began appearing, which began charging a premium for coffee in the period of falling prices. Gourmet coffee houses tend to open in high-rent areas and cater to higher income consumers. Because of the change they created for taste and preferences and the higher income market, the gourmet coffee houses had a win-win in a period of falling wholesale prices and increasing retail prices. But in the middle of the decade, the party was over, and wholesale prices started increasing because of some shortages caused by weather and the rising overall market prices again. Where is the new equilibrium price? Equilibrium price is the price set by the interaction of supply and demand. It is the price wherein the quantity demanded by consumers at a certain price and the quantity that suppliers is willing to supply meet. (Tutor2u) Following graphs show the equilibrium price of coffee. Fig. 3 Shown at Fig. 3 is a graph showing an oversupply of production of coffee that lowered its price. While prices are down gourmet coffee houses took advantage of the falling prices and had a win-win situation. Overtime, prices started to increase again because of shortage of supply due to weather conditions. FIG. 4 We have here a graph that shows the relation of price and sales that shows fluctuation over time. At different years, equilibrium of price and production are not met. In Year 1, price is high and production is low. Farmers have been encouraged to plant coffee, so in year 2, there is an increased production, and by this time, price went down. In year 3, production went down because of adverse weather, causing the price to rise again. So in year 4, we see increased coffee production, showing an oversupply of the commodity that lowers again the price. The new price equilibrium at this point is shown below where the amount consumers wish to purchase at a particular price is the same as the amount producers are willing to offer for sale at that price. It is the point at which there is no incentive for producers or consumers to change their behaviour. Graphically, the equilibrium price and output are found where the demand curve intersects (crosses) the supply. FIG. 5 How does the elasticity of the demand for coffee affect the price? Price elasticity measures the effect of price changes on quantity demanded. Formula for getting price elasticity (NetMbA) is: By example, price elasticity of coffee is determined in the following hypothetical values: Price of coffee P1 = 5 Quantity demanded Q1 =6 Increase to P2= 6 Lowered to Q2 =5 Price (P) goes from 5 to 6 Quantity (Q) from 6 to 5 To solve for elasticity: Quantity: 5-6 = 1 Ave. Quantity (6-5)/2 = 5.5 Relative change in quantity demanded = =5.5 Price 6 - 5 = 1 Average price (5 + 6)2 = 5.5 Price elasticity 5.5 / 5.5 = 1 We get a value of elasticity of E = 1 that means a small change in price will not affect the total revenue. If we get a value of E ? 1 meaning quantity demanded is elastic, so that a price change will cause an even larger change in quantity demanded. The implication is that if coffee has high price elasticity of demand, a price increase will result in revenue decrease because revenue lost will be more than the revenue gained from the price increase. If we get a value of E? 1, the price change will cause less of a change in quantity demanded, and therefore demand is inelastic. Scenario 3. You have been asked to discuss the differences between the microeconomic definitions of supply and demand and the macroeconomic differences of aggregate supply and demand. Draw 2 flowcharts that show the differences in what determines supply and demand and aggregate supply and demand. Explain what happens to the curves in the flowchart and how outputs are affected. Make sure that you include price as a variable. Then, describe the following examples on a graph to determine the new equilibrium price or price level. Explain whether this is an example of the microeconomic definition of supply and demand or the macroeconomic definition of aggregate supply and demand. Did this cause a shift in the curve or a movement along the curve? Demand refers to the quantity of how much consumers would like to buy a product at a given price while supply is how much market can offer FIG. 6 Demand graph. In Fig. 6, points A, B, and C are the quantity demanded. We see here the relations of price to demand that as price goes up, quantity demanded declines. For example, at price P3, the quantity demanded is point C, and Q3. When the prices go up to point B, and to point A, we see decline in demand in quantity. FIG. 7 Supply Graph We see here a supply graph that shows the relation of price with quantity supplied. This is an inverse and upward slope wherein changes in quantity supplied increases as price also increases. The supply graph shows that producers of coffee would like to flood the market with the product because the price is high. 1. After Hurricane Katrina, what happened to the price of fish? This is only a hypothetical example because of unavailability of data. Before Katrina, the equilibrium price is between $2 to$ 3, but because of the typhoon, supply of fish become scarce, demand increased from Do to D1 that increases the equilibrium price between $3 to $4. Because of the price increase, fishermen will increase their supply to take advantage of the increase. Fig. 7 2.After the development of the microchip, what happened to the price of computers? FIG. 7 Let us assume that P2 is the price of computer before the development of microchip, which is $90. When microchip was developed, price of computers went down to P1 that is $50. At point P1, quantity demanded has increased. 3. After the government raised tariffs on imported cheese, what happened to the price of domestic cheese? FIG. 8 Point a is the price paid by the consumer on imported cheese. Point b is the price received by supplier once tax is imposed. The impact of the tax is the increase in price of imported cheese lowering its demand; while price of domestic cheese is low. We see that quantity demanded in local cheese increase while demand for imported cheese decreases. 4.Polyester suits have become trendy again. What happens to their price? When polyester suits become trendy again, demand will increase because people want to go with the fashion. Graph below show a shift of demand from Do to D1 because of the consumer demand for polyester suits. Because of this demand, equilibrium price also changes from $2 to $3. 5. Internet auction sites are becoming more popular, and people are using them more and more. People go to internet auction sites to shop online. As it becomes popular, revenue of on line stores increases while revenue of traditional shopping venues decline. The shift to online auction sites reduces the sales and revenues of shopping malls and department stores. Illustration in Fig. 9 can also e applied to shift in demand to internet shopping, because as interest increases Demand 0 will go to a higher level of Demand 1 that eventually increases the supply and price. Fig. 9 can also be used as a basis when demand shifts to the left. 6. A new health report came out that said red wine lowers cholesterol. As a result of the health report claiming that red wine lowers cholesterol, it is expected that demand for the product from health conscious people will increase. Fig. 9 shows shift of demand for red wine increasing as people becomes conscious of cholesterol level. 7.The government raises taxes. Factors such as government regulations raise the price of a product such that the market will have new price equilibrium (Watkins, Thayer) Here, we see Point A as the price to be paid by consumers once tax is imposed. Point C is the price received by the supplier once tax is imposed. The difference between A and C is equal to the amount of tax . The impact is the shift of the supply curve (Supply without tax) to a new supply curve (supply with curve). Thus, what we see here is the increase in the price of the good and the decrease in revenue of supplier. Here we see also that both consumer and supplier share the tax burden. 8.Inflation increases. Inflation has been defined as a persistent increase in the level of consumer prices and the decline of purchasing power. So, when one sees the cost of a product increase, summarily, they call it inflation. But inflation is not just about price increases. It is the result of different factors that takes aggregate supply, increased costs of production, increases in government spending and the depreciation of the local exchange rate (Hakal, Reem. 2005) . Let us take Fig. 10 as an example. Fig. 10 Fig. 10 shows the level of output that can be achieved at price level of P1 and P2. As production costs increases, the aggregate supply (AS) decreases (ASI to AS2) assuming production is at full capacity. This causes an increase in the price level from P1 to P2; this means that for companies to maintain or increase profit margins, they will need to raise the retail price paid by consumers, thereby leading to inflation. 9.Immigration laws are relaxed. It is expected that when immigration laws are relaxed, there will be more foreigners who would enter the country. Immigration increases the number of people and raises consumption and demand of goods and services. Increase of population is also an indication of economic growth and an introduction of a new production possibility frontier (Tutor2u) as shown in Fig. 11. 10.The government increases spending. As government increases spending, flow of money in circulation increases. There will be more employment, production and trade. Employment gives people source of income to use for household expenditures and other personal expenses. Government invests in infrastructure development that encourages investments in different areas of investment of the country. Trade is enlivened as there will be more products to export and more inputs are needed coming from other countries. It becomes an economic cycle that in the long run affects the supply and demand. REFERENCES Hekal, Reem. (2005). Cost-Push Inflation vs. Demand-Pull Inflation. Investopedia. http://www.investopedia.com/articles/05/012005.asp#axzz1VqGp79vd Investopedia. Opportunity Cost. Viewed 24 August 2011 from http://www.investopedia.com/terms/o/opportunitycost.asp#axzz1VqGp79vd NetMBA. Price Elasticity of Demand. Viewed 24 August 2011 from http://www.netmba.com/econ/micro/demand/elasticity/price/ Tutor2u. Production Possibility Frontier. Viewed 24 August 2011 from http://tutor2u.net/economics/revision-notes/as-markets-production-possibility-frontier.html Thayer, Watkins. The Impact of an Excise Tax or Subsidy on Price. San Jose State University. Department of Economics. Viewed 24 August 2011 http://www.sjsu.edu/faculty/watkins/taximpact.htm Tutor2u. Production Possibility Frontier. Viewed 24 August 2011 from http://tutor2u.net/economics/revision-notes/as-markets-production-possibility-frontier.html Read More