Question 1PART A The given scenario would present a new rush and demand for tea after a short temporary higher demand for the coffee. In real life situations, there would be immediate short increase in the quantity of coffee demanded as precautionary measures to guard against the planned price increase. But more importantly, coffee which has perfectly cross price elasticity of demand with tea would witness an eventual decrease in the quantity demanded. There would be a new rightward shift to a new demand curve for the tea product which is a very close substitute for coffee in satisfying the same beverage needs.
This is on the assumption that there is a prevailing competitive price of tea presently and in the event of the planned increase. If say the present price of coffee and tea is $x and $y respectively where x is greater than or equal to y, then given the speculated price increase $(x+2), there would be a shift to a new demand from coffee to tea by consumers which affects the supply of both goods in the short and long runs. Part BThe figure describes a complete change in the supply off one commodity to a new one which has close similarities.
It highlights a trend change in the supply matrix of two goods with similar utility value probably due to price determinants. This usually occur in a perfectly competitive market A clear example is the international commodity market selling commodities like cement, small crops etcetera. Price differentiation between commoditiesChange in taste by consumersFavorable opportunity costs to the new commodity suppliedNew and cheap techniques of production including cheap available resources. Government policies on former commodity including firm shut down. Factors that cause movement along the supply curve are thus: Cost of Production: This is the aggregate total expenditure on the production of goods and services.
The total cost TC of producing goods determines the quantity of output available for sale. Pricing conditions: the market determined price assuming a perfect market condition, affects the supply of goods and services. Where the price is less than the marginal cost of production, Profit is not made and the firm might decide to scale down production to induce price increase. Demand matrix: A higher demand might push an increase in the production and supply of commodities while a decreased demand on the same item might lead to the reverse. Part CElasticity is degree of responsiveness of demand and supply of goods and services to price and other economic variable determinants changes in perfect market conditions.
It measures the rate at which the demand and supply of goods and services changes to the significant alteration of some economic variable such as price, income etcetera. It is expressed as a nominal coefficient of the measured economic variable. Let the price and quantity demanded at point E be P2=$400 and Q2=300 units respectively and at point Z P1=$200 and Q1=350 units, so that using the midpoint rule it gives that P2-P1 =# where # is the price elasticity of demand.