Answer to Question #191296 in Microeconomics for Jean-marie

Question

Based on the information given in the following scenarios, graphically illustrate the following changes in the equilibrium price and/or equilibrium quantity:

Note: You may use fictitious figures to motivate your answer. Your answer must include a discussion of the graph.

The market for coffee has been relatively stable in the past. However, following a labour union strike among factory workers, the wage rate of factory workers in the coffee industry was renegotiated upwards (increased). At the same time, a study was published claiming significant health benefits coffee from drinking coffee daily. Therefore, coffee has become more attractive to consumers.

Answer 1

An increase in labor wage can be represented as an increase in the cost of production. Hence, an increase in cost, given the price has remained unchanged will lead to suppliers producing less quantity at the existing price. Similarly, an increase in preference for coffee means an increase in demand for coffee represented by an upward shift in the demand curve. Hence, the supply and demand situation can be represented as:

Here, an increase in wage is represented as a decrease in supply owing to an increase in the cost of production. The supply curve shifts from S to S'. Similarly, an increase in preference towards coffee is represented by a shift in the demand curve to the right from D to D'. The new equilibrium is taken at E' and it is assumed that an increase in demand for coffee is more than the decrease in supply, leading to an increase in price and quantity of coffee in the market.