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Chapter 2: Problem 4

Out of the following events, which are likely to cause the demand for coffee to increase? Explain your answers. a. An increase in the price of tea b. An increase in the price of doughnuts c. A decrease in the price of coffee d. The Surgeon General's announcement that drinking coffee lowers the risk of heart disease e. Heavy rains causing a record-low coffee harvest in Colombia

Short Answer

Expert verified
Events likely to increase coffee demand: increase in tea price, decrease in coffee price, and positive health report on coffee.

Step by step solution

01

Evaluate the Effect of Substitute Goods

An increase in the price of tea, which is a substitute good for coffee, will likely cause the demand for coffee to increase because consumers might switch from buying tea to buying coffee due to the higher price of tea.
02

Evaluate the Effect of Complement Goods

An increase in the price of doughnuts, which can be considered a complement good to coffee, will likely cause the demand for coffee to decrease. This is because people tend to buy these two goods together, so higher prices for doughnuts might discourage the purchase of both.
03

Evaluate the Effect of Price Changes

A decrease in the price of coffee will likely cause the demand for coffee to increase. As coffee becomes cheaper, more consumers can afford to buy it, leading to increased demand.
04

Consider the Impact of Health Announcements

An announcement by a recognized health authority that drinking coffee lowers the risk of heart disease would likely lead to an increase in demand. This is because such positive health information can increase the attractiveness of coffee to health-conscious consumers.
05

Evaluate Supply Side Factors

Heavy rains causing a record-low coffee harvest in Colombia will decrease the supply of coffee rather than increase demand. This might lead to higher prices due to scarcity, but it doesn't directly increase demand.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Substitute Goods
When one product can replace another, these are known as substitute goods. Tea and coffee are excellent examples. If the price of tea goes up, people might switch to coffee because it's now relatively cheaper. This is based on consumer preference and cost comparison. As tea prices rise, coffee becomes more attractive, boosting its demand. Substitute goods help consumers balance their consumption based on price and availability.
Complement Goods
Complementary goods are those that people tend to use together. Coffee and doughnuts often fall into this category. When the price of a complement like doughnuts increases, it can make both goods less appealing. As doughnuts become more expensive, fewer people might buy them, potentially reducing coffee demand as well. Consumers usually look for cost-effective paired purchases, and a price increase in one can disrupt this balance.
Price Changes
Price changes can significantly impact demand. When the price of coffee decreases, it becomes more affordable for a larger number of people. This is because lower prices make coffee more accessible, prompting an increase in demand. Such a price reduction encourages consumers to buy more coffee or to opt for higher quality options. Price elasticity means that a small change in price can lead to larger changes in demand.
Health Announcements
Health announcements from credible sources can greatly influence consumer preferences. For instance, if coffee is said to lower heart disease risk, many people may be encouraged to drink more coffee. This kind of positive health news can elevate coffee's market appeal. Consumers who are health-conscious or interested in long-term well-being might increase their coffee consumption, thereby boosting demand. Health benefits can be a powerful driver in consumer choices.
Supply Side Factors
Supply side factors such as natural disasters or poor harvests can impact product availability but don't directly increase demand. Consider a heavy rainfall in Colombia harming coffee production. This situation limits supply, potentially driving prices up due to scarcity. While the higher price doesn't raise demand, it can, however, influence consumer behavior by making coffee less affordable. Understanding supply side dynamics helps in predicting price trends rather than direct demand outcomes.

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Most popular questions from this chapter

Suppose that budding economist Buck measures the inverse demand curve for toffee as $$P=\$ 100-Q^{D}$$ and the inverse supply curve as \(P=Q^{S}\) Buck's economist friend Penny likes to measure everything in cents. She measures the inverse demand for toffee as \(P=10,000-100 Q^{D}\) and the inverse supply curve as \(P=100 Q^{S}\). a. Find the slope of the inverse demand curve and compute the price elasticity of demand at the market equilibrium using Buck's measurements. b. Find the slope of the inverse demand curve and compute the price elasticity of demand at the market equilibrium using Penny's measurements. Is the slope the same as Buck calculated? How about the price elasticity of demand?

How is each of the following events likely to shift the supply curve or the demand curve for fast-food hamburgers in the United States? Make sure you indicate which curve (curves) is affected and if it shifts out or in. a. The price of beef triples. b. The price of chicken falls by half. c. The number of teenagers in the economy falls due to an aging population. d. Mad cow disease, a rare but fatal medical condition caused by eating tainted beef, becomes common in the United States. e. The Food and Drug Administration publishes a report stating that a certain weight-loss diet, which encourages the intake of large amounts of meat, is dangerous to one's health. f. An inexpensive new grill for home use that allows consumers to make delicious hamburgers is heavily advertised on television. g. The minimum wage rises.

In the United States, the biggest shopping day each year is "Black Friday," the day after Thanksgiving. Every Black Friday, the local branch of a major retailer makes this offer to the public: the first 10054 -inch HD flat-screen televisions sold will sell at the discounted price of \(\$ 50\) each. Customers line up before the store opens its doors to take advantage of this tremendous bargain. a. In this scenario, what is the "price" of a 54 -inch flat-screen television? b. How would that "price" likely change if the retailer offered the first 500 , instead of the first 100 , televisions at \(\$ 50\) apiece? If only the first 50 were offered at the discounted price?

Suppose the demand for towels is given by \(Q^{D}=100-5 P\) and the supply of towels is given by \(Q^{S}=10 P\)/ a. Derive and graph the inverse supply and inverse demand curves. b. Solve for the equilibrium price and quantity. c. Suppose that supply changes so that at each price, 20 fewer towels are offered for sale. Derive and graph the new inverse supply curve. d. Solve for the new equilibrium price and quantity. How does the decrease in supply affect the equilibrium price and quantity sold? e. Suppose instead that supply does not change, but demand decreases so that at each price, 25 fewer towels are desired by consumers. Solve for the new equilibrium price and quantity. How does the decrease in demand affect the equilibrium price and quantity sold? How do those changes compare to your response in (d)?

Suppose the demand for down pillows is given by \(Q^{D}=100-P\), and that the supply of down pillows is given by \(Q^{S}=-20+2 P\) a. Solve for the equilibrium price. b. Plug the equilibrium price back into the demand equation and solve for the equilibrium quantity. c. Double-check your work by plugging the equilibrium price back into the supply equation and solving for the equilibrium quantity. Does your answer agree with what you got in (b)? d. Solve for the elasticities of demand and supply at the equilibrium point. Which is more elastic: demand or supply? e. Invert the demand and supply functions (in other words, solve each for \(P\) ) and graph them. Do the equilibrium point and relative elasticities shown in the graph appear to coincide with your answers?
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