The following questions address the concepts of supply and demand as they relate to the production of coffee. In the first scenario, scientific studies show that coffee contains some antioxidants. The result will create an increased public demand because of newly perceived health benefits such as it being a natural diuretic. There has been a shift in the demand for coffee from Q1 to Q2 because the original demand relationship has changed (Heakal, 2003, p. 4). If coffee plants from major producing countries are affected by drought, however, the supply and demand relationship will result in disequilibrium because Q* has been thrown out of alignment resulting in increased prices (Heakal, 2003, p. 2). If the price of donuts increases, this will indirectly affect the coffee market because fewer people will purchase coffee to go with their preferred pastry. Therefore, the price of coffee may drop if donut prices stay too high to appeal to the coffee consumer who has been lost because demand is elastic in the coffee market and there has been a downward movement in P* (Baker, 2006, p. 4; Heakal, 2003, p. 3-4). If growers impose exterior Fair Trade rules in support of improvements in worker conditions, the cost of production will increase thereby creating increases on the supply curve (Heakal, 2003, p. 1). Such scenarios often occur.
The second problem concerns Mr. Dash's coffee drinking habits. If he drinks two cups daily no matter what, he will contribute to a trend promoting the inelasticity of coffee because his buying habits are unresponsive to the current market (Baker, 2006, p. 1). If the price of coffee increases by 30% and the percentage change in quantity demanded is reduced by 10%, the resulting elasticity will be a factor of -33% based on formula E=ΔQ % / ΔP %. When the price of coffee increases by the above-outlined factors, total revenue goes down because there are not enough purchases to offset the shifting price movement (Heakal, 2003, p. 3). Based on the above figures, it appears that coffee demand is elastic (Baker, 2006, p. 1). Elasticity determines profits.
Baker, S. L. (2006, January 1). Elasticity. Economics Interactive Tutorial. Retrieved from http://hspm.sph.sc.edu/COURSES/ECON/Elast/Elast.html
Heakal, R. (2003, January 1). Economics Basics: Supply and Demand. Investopedia. Retrieved from http://www.investopedia.com/university/economics/economics3.asp