Question

ent Score: Hint 4 of 25 The accompanying graph represents the market for coffee. Demonstrate how the market for coffee changes if the price of tea, a substitute for coffee, decreases, and due to better weather, the price of coffee beans also decreases. Equilibrium quantity Market for Coffee Equilibrium price Equilibrium quantity Quantity

Answer 1

The market of coffee is given. The maker of tea, a substitute for coffee, lowers the price. As the price of substitute goes down, the demand for its substitutes fall because now consumers starts demanding the commodity with less price as they both gives equal level of satisfaction to the consumers. Thus, as the price of tea falls, the demand for coffee falls. Therefore the demand curve shifts leftwards. On the other hand, the price of coffee beans decreases because of good harvest. Coffee beans are the basic raw material required to produce coffee. Thus as a result of this the supply of coffee increases even at the same price. Thus the supply curve shifts rightwards. The graph is drawn below: Initially the market is in equilibrium at point E. After the leftward shift in the demand curve and rightward shift in the supply curve, one thing which is obvious is that the equilibrium price will decrease but the equilibrium