Economics mod 2 case: Demand supply and elasticity

Module 2 - Background

In this module, you are required to learn the basic theories of supply and demand. Supply and demand are the forces that make the market function. You will also study the concept of Elasticity. Elasticity is the measure of responsiveness of one variable from a change in another variable. In this course, we focus on the price elasticiy of demand. It is ratio of the percentage change in quantity demanded to the percentage change in a price of good. Essentially, it measures how consumers respond to changes in price. Please read the following materials (be sure to read the required sections):

Required Reading

Rittenberg L. and T. Tregarthen (2009). Chapter 3: Demand and Supply. Principles of Microeconomics. Retrieved from: http://www(dot)web-books(dot)com/eLibrary/NC/B0/B63/TOC.html

Rittenberg L. and T. Tregarthen (2009). Chapter 5: Elasticity and A Measure of Response Sections 1 and 2. Principles of Microeconomics. Retrieved from: http://www(dot)web-books(dot)com/eLibrary/NC/B0/B63/TOC.html

Course Handouts

Supply and Demand

Supply and Demand Issues

Optional Reading

Exercises of Elasticity—Interactive Questions and Answers. Retrieved February 18, 2011 from: http://hspm(dot)sph(dot)sc(dot)edu/COURSES/ECON/Elast/Elast.html

Investopedia, Economic Basics: Supply and Demand: Retrieved February 18, 2011 from:http://www(dot)investopedia(dot)com/university/economics/economics3.asp

Roberts, Russell. (2007). "Where do Prices Come from?" Library of Economics and Liberty. Retrieved February 18, 2011 from:http://www(dot)econlib(dot)org/library/Columns/y2007/Robertsprices.html

Schenk, Richard. (2009). The Model of Supply and Demand. CyberEconomics. Retrieved February 18, 2011 from: http://ingrimayne(dot)com/econ/DemandSupply/OverviewSD.html

Note: All readings were validated on March 17, 2013.

Module 2 - Case

Case Assignment

Write a 3-page essay that addresses the following FOUR questions on the market for coffee. (For this case, keep it simple; don't worry about different brands, whether it is store-bought or prepared at home, etc.)

1. Explain what happens to price and quantity of coffee when the following events occur (you do not need to analyze the event itself but rather focus on the effect on supply and demand of coffee):
   1. A scientific study shows that coffee helps reduce weight gain.
   2. Coffee plants from major producing countries are affected by drought. (Fun fact: a coffee bean is a misnomer for the seed of a coffee plant.)
   3. The price of tea decreases.
   4. In order to protect growers that have better working conditions for workers (referred to as Fair Trade), a price floor on coffee is implemented.
2. Suppose Mr. Washington drinks 3 cups of coffee every day no matter what the price. What kind of elasticity does it have?
3. Suppose that when the price of coffee increases by 40%, the percentage change in quantity demanded by consumer is reduced by 10%. Calculate the elasticity.
4. Based on your answer to Question 3, What happens to total revenue when the price of coffee is increased. Why?

Some helpful suggestions on completing the assignment:

For each event, you must specify how it effects either demand, quantity demanded, supply, or quantity supplied. It is also important to demonstrate how the change will affect the market demand or supply curve. Also, be sure to state any assumption you are making regarding the relationship of the event and coffee.

Here is an example of the best way to answer question #1 above:

Event: Price of donut decreases.

Assume that donuts are a complement for coffee. If donuts are cheaper, then the consumer will increase quantity demanded of donuts. If consumers buy more donuts, then there will be a increased demand for coffee because it is its complement. This event causes a shift of the demand curve to the right. The shift will cause price and quantity of coffee to increase.

Here is also some helpful information on how to address the elasticity questions:

Inelastic goods (goods in which consumers are less responsive to changes in price): e < |-1|

Elastic goods (goods in which consumers are more responsive to changes in price): e > |-1|

In this course, we use the absolute value of elasticity. The price elasticity of demand is always calculated as a negative value due to the law of demand (inverse relationship between price and quantity).

Assignment Expectations

Use concepts from the modular background readings as well as any good-quality resources you can find. Be sure to cite all sources within the text and provide a reference list at the end of the paper.

Length: 3 pages double-spaced and typed.

The following items will be assessed in particular:

Answer the following questions after your essay is complete this can go under the references page.

The recent recession has hurt several industries due to a decline in demand by households. Think of the relationship between income and demand and discuss the following questions:

1. What are "normal" goods? Define and give an example in our current economy.
2. What are "inferior" goods? Define and give an example in our current economy.
3. Do you think luxury goods are have more elastic or inelastic demand? Explain.

• Your ability to understand an application of supply and demand.
• Some in-text references to the modular background material (APA formatting not required).
• The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings.