Answer to Question #221619 in Microeconomics for Fastcar

Question

Suppose the National Institutes of Health publishes a study finding that coffee drinking reduces the probability of getting colon cancer. How do you imagine this will affect the market for coffee? Why? Which determinant of demand or supply is being affected? Show graphically with before- and after-curves on the same axes. How will this change the equilibrium price and quantity of coffee? Explain your reasoning.

Answer 1

a. Positive news about coffee reducing the chances of cancer will have a positive impact on the demand for coffee. More customers will be willing to buy coffee since it will be helpful to their general health. Supply on the other side will increase to satisfy the increasing demand.

b. The determinant being affected is price

c. An increase in demand causes supply to increase in the long term as shown below

In case price remains the same, supply and demand curves will shift right leading to increase in quantity as depicted in the graph below

In case of a rise in demand but fall in supply the effect will cause a large rise in price. This following graph shows that

d. An increase in demand, all other things unchanged, will cause the equilibrium price and equilibrium quantity supplied to increase. An increase in supply, all other things unchanged, will cause the equilibrium price to fall and quantity demanded will increase.