Economics 201 Section 01

Matthew Hensley

ENCS 201 section 01

Examination 2

1a. The dry weather in Brazil, where the Arabica coffee beans grow, causes an exogenous shock to the supply side of the beans. The shortage of Arabica coffee beans causes an increase in the market price. As market price increases, consumers decrease their rate of consumption (decrease in quantity demanded) and producers decrease the rate of production (a reduction in quantity supplied) which results in a decrease in equilibrium quantity and an increase in equilibrium price.

1b. Because the price of the Arabica beans increased, it causes an exogenous shock to the demand side of the Robusta coffee beans, a substitute. Because the price of a substitute increases, the demand for Robusta beans increases which will lead to a shortage and thus an increase in market price. As the market price rises, consumers reduce their rate of consumption (a decrease in quantity demanded) along the new demand curve and producers increase the rate of production (an increase in quantity supplied) which results in an increase of both equilibrium price and quantity.

2. First of all demand and quantity demanded are two separate terms. Demand is the entire downward sloping line on a Price vs. Quantity graph, while quantity demanded is a single point on the graph. If a seller of a good X has 100 customers a day and then increases the price of good X and only gets 20 customers a day, the demand for good X didn't decrease, the quantity demanded of good X decreased because 80 of the customers no longer found good X to be worth the new price. Demand would only change if the customers were persuaded by something other than price. For example if a new study found that good X can increase the users lifespan, it would cause an increase in the demand for good X. In order for the seller to get back to 100 customers a day (increase the quantity demanded) he has to lower the price back to where is was because the lower price is what the other 80 customers are willing to pay.