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How will a fall in price of tea affect the equilibrium price of coffee? Explain the chain of effects. |
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Answer» Solution :Due to fall in price of tea the demand CURVE for coffee shifts leftward as shown in the given figure. In the given diagram price of coffee is on vertical AXIS and quantity demanded and supplied is on horizontal axis. Initially, the equilibrium price is OP and equilibrium quantity is OQ. But due to fall in price of tea the demand curve of coffee shifts leftward from DD TO `D_(1)D_(1)` With new demand curve `D_(1)D_(1)` there is excess supply at initial price OP because at price OP demand is PB and supply is PA, so, there is excess supply of AB at price OP. Due to this excess supply COMPETITION AMONG the producer will make the price fall. Due to fall in price, there is a downward movement along the demand curve (Expansion in demand) from B to C, and similarly there is a downward movement along the supply curve (Contraction in supply) from A to C. So, finally, the equilibrium price falls from OP to `OP_(1)`, and equilibrium quantity also falls from OQ to `OQ_(1)` . So, due to fall in price of Tea, (i) Equilibrium price of coffee falls from OP to OP,, and (ii) Equilibrium quantity of coffee also falls from OQ to `OQ_(1)` ` (##FM_M_ECO_XII_P1_C12_E02_046_S01.png" width="80%"> |
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