Chapter 7, Problem 2FRQ

To determine

The question requires us to draw a graph that represents the equilibrium, and also, show the impact of a decreased price on the equilibrium price and equilibrium quantity in the coffee market.

Explanation of Solution

When the price of coffee beans falls, the input costs will fall for the suppliers of cups of coffee and thus supply will increase in the market.

The following graph represents the equilibrium in the market for cups of coffee:

  

Here, E1 represents the equilibrium point where P1 is the equilibrium price, and Q1 represents the equilibrium quantity in the market for a cup of coffee.

An increase in supply due to the lower costs of production shifts the supply curve to the right from S1 to S2 and causes the equilibrium price to fall from P1 to P2, and the equilibrium quantity to rise from Q1 to Q2.

Answer:

• Point E represents the initial equilibrium in the market.
• Equilibrium price will fall.<
• Equilibrium quantity will increase.