Economics
Scenario
In the first phase, the price of coffee increased and thus lured producers into the market. This caused the supply to move up the curve. The increased supply caused the demand to decrease and thus caused the overproduction. The mechanism is shown below graphically.
The graph shows the coffee market at an equilibrium price of 3.25. The increase in price caused the supply to rise and the demand to fall. This lead to an over production of Q3-Q2.
As the demand was unchanged, an overproduction occurred and the price began to come down. The suppliers began to cut down the supply and the price became lower than the equilibrium price. During all this confusion, coffee houses began to open up in the areas of high income earners and they started charging a premium for coffee. This brought the market to equilibrium but new firms had started entering the market. These firms enjoyed abnormal profit as they were charging a price higher than market price. The demand also increases as a result of the establishment of these firms as the high income groups get attracted towards these coffee houses due to their good taste.
The market returns to equilibrium with a price less than the previous one. The quantity traded, however, increases.
With the price constantly going down and an inelastic demand due to high income, the coffee houses were the most benefitted party in this scenario. As the price of the coffee comes down, these retailers get more and more profits. The high price has very little effect on the demand of the product because of the preferences and high income of the consumers. So, the gourmet coffee houses charge more and more premium. The demand and supply are affected to a minimal extent as the coffee houses target groups with high income. So the supply and demand are somehow inelastic and these changes will not affect them considerably.
In the middle of the decade, some weather problems caused the supply of the coffee to fall. This lead to shortage of coffee in the market and the price began to rise again. The leisures enjoyed by coffee houses during periods of low price was over. The profits of these coffee houses were reduced as the difference between retail price and the market price was reduced. This reduction in supply resulted in a shortage and a new equilibrium. The new equilibrium had a higher price and a lower quantity traded.
Scenario 2:
Microeconomics describe demand as the need for a good or service at a given price and supply as the availability or production of the said good / service at that price. While, macroeconomics describe aggregate demand as the total demand for goods and services in any country / economy at any time and at a give price level and aggregate supply is described as the total amount of goods and services that an economy plans to produce and sell during a time period. (Parker, 2010)
There are many factors that affect the demand and supply of a product. These factors are called determinants. The determinants of demand are the factors that are related to the consumers and their mindsets. The first factor is income. The higher the income of a person, the greater his demand for a product. Secondly, the price of substitutes and complements also play an important part in determining the demand of a product. Price of complements has a direct effect and the price of substitutes has an inverse relation to a product's demand. Moreover, people's tastes and preferences also matter in case of demand. The expectation of people about their income, availability of good and the price of good also matters. (Lipsey and Harbury, 1992)
The primary factor that determines supply is the cost of production. In case of a lower cost of production, producers can produce more. In addition to that, the greater the number of sellers in the market, the greater the supply. Moreover, if a seller expects the price to fall in the near future, they will increase the supply and sell more to enjoy the profits available. (The Determinants.., n.d.)
As the aggregate demand and supply are related to the whole economy, they have different determinants. The first factor that affects the aggregate demand is consumer spending. This is the total amount of products consumed by consumers in an economy. Secondly, investment spending also determines demand as it is directly related to the demand for capital goods. In addition to that, government spending is also a major determinant of aggregate demand as government spending for infrastructure increases the demand for related products. Lastly, net exports also affect the aggregate demand. (Sloman, 2006)
Aggregate supply is affected by the price of inputs required to produce. If the...
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