Economics Scenario in the First Phase, the Essay

Economics

Scenario

In the first phase, the price of coffee increased and thus lured producers into the market. This caused the supply to move up the curve. The increased supply caused the demand to decrease and thus caused the overproduction. The mechanism is shown below graphically.

The graph shows the coffee market at an equilibrium price of 3.25. The increase in price caused the supply to rise and the demand to fall. This lead to an over production of Q3-Q2.

As the demand was unchanged, an overproduction occurred and the price began to come down. The suppliers began to cut down the supply and the price became lower than the equilibrium price. During all this confusion, coffee houses began to open up in the areas of high income earners and they started charging a premium for coffee. This brought the market to equilibrium but new firms had started entering the market. These firms enjoyed abnormal profit as they were charging a price higher than market price. The demand also increases as a result of the establishment of these firms as the high income groups get attracted towards these coffee houses due to their good taste.

The market returns to equilibrium with a price less than the previous one. The quantity traded, however, increases.

With the price constantly going down and an inelastic demand due to high income, the coffee houses were the most benefitted party in this scenario. As the price of the coffee comes down, these retailers get more and more profits. The high price has very little effect on the demand of the product because of the preferences and high income of the consumers. So, the gourmet coffee houses charge more and more premium. The demand and supply are affected to a minimal extent as the coffee houses target groups with high income. So the supply and demand are somehow inelastic and these changes will not affect them considerably.

In the middle of the decade, some weather problems caused the supply of the coffee to fall. This lead to shortage of coffee in the market and the price began to rise again. The leisures enjoyed by coffee houses during periods of low price was over. The profits of these coffee houses were reduced as the difference between retail price and the market price was reduced. This reduction in supply resulted in a shortage and a new equilibrium. The new equilibrium had a higher price and a lower quantity traded.

Scenario 2:

Microeconomics describe demand as the need for a good or service at a given price and supply as the availability or production of the said good / service at that price. While, macroeconomics describe aggregate demand as the total demand for goods and services in any country / economy at any time and at a give price level and aggregate supply is described as the total amount of goods and services that an economy plans to produce and sell during a time period. (Parker, 2010)

There are many factors that affect the demand and supply of a product. These factors are called determinants. The determinants of demand are the factors that are related to the consumers and their mindsets. The first factor is income. The higher the income of a person, the greater his demand for a product. Secondly, the price of substitutes and complements also play an important part in determining the demand of a product. Price of complements has a direct effect and the price of substitutes has an inverse relation to a product's demand. Moreover, people's tastes and preferences also matter in case of demand. The expectation of people about their income, availability of good and the price of good also matters. (Lipsey and Harbury, 1992)

The primary factor that determines supply is the cost of production. In case of a lower cost of production, producers can produce more. In addition to that, the greater the number of sellers in the market, the greater the supply. Moreover, if a seller expects the price to fall in the near future, they will increase the supply and sell more to enjoy the profits available. (The Determinants.., n.d.)

As the aggregate demand and supply are related to the whole economy, they have different determinants. The first factor that affects the aggregate demand is consumer spending. This is the total amount of products consumed by consumers in an economy. Secondly, investment spending also determines demand as it is directly related to the demand for capital goods. In addition to that, government spending is also a major determinant of aggregate demand as government spending for infrastructure increases the demand for related products. Lastly, net exports also affect the aggregate demand. (Sloman, 2006)

Aggregate supply is affected by the price of inputs required to produce. If the prices are low, the supply will increase. The productivity also affects the aggregate supply. If there is low productivity, then the supply will fall. Moreover, the legal and political environment also government introduces favorable policies and laws, the supply will flourish. (Sloman, 2006)

All the above given factors cause the demand/supply curve to shift. The movement along the curve is caused price in case of normal demand and supply and price level in case of aggregate demand and supply. (Sloman, 2006)

Hurricane Katrina

After Katrina, the supply of fishes reduced as the fishermen were afraid to go out and catch fishes. So the reduced supply caused shortage of fish and the price increased. This is a microeconomic definition as only the fish market is considered in the question. This will cause a shift in the supply curve which is shown in the graph. Supply shifts from S1 to S2.

Development of Microchip

After the invention of microchip, people got attracted towards computers. It was a new dimension in the world of computers. As the demand increased, the curve shifted towards right. This caused the equilibrium price and quantity to rise. This is a microeconomic issue. This mechanism is graphically illustrated below.

Raised Tarrif

The increase in tariff will cause the demand for domestic cheese to increase. This will cause the demand to shift right and a new equilibrium will be formed. This is a macroeconomic issue as the net exports will change after this and this will affect the aggregate demand positively. The mechanism is illustrated below.

Trendy Polyester Suits

As the polyester suits become trendy again, people will start liking them and the demand for these suits will increase. This will cause a rightward shift in the demand curve and the price of these suits will also increase. This is a microeconomic issue. The graph below illustrates the situation.

Increased Demand for Websites

This increase in demand will cause a rightwards shift of the demand curve. A new equilibrium will be formed with a higher price being charged for these websites. This is considered to be a microeconomic issue.

Red Wine Lowering Cholesterol

The report will lure all the cholesterol patients to come and enjoy the red wine with an additional advantage. The demand for red wine will increase and thus the curve will shift rightwards. The equilibrium price will also increase. This is a microeconomic issue illustrated below.

Increased Tax

This step will have a direct effect on the supply of the product as taxes are mostly intended to reduce production. As the supply will reduce, the price will increase and the quantity traded will also be reduced. This is a microeconomic issue illustrated below.

Increased Inflation

Increase in inflation will cause aggregate GDP to fall as the people will find it difficult to consume goods. This will happen with the investors as well. Thus, the economy will not thrive well. It will cause a leftward movement along the aggregate demand curve as shown below. It is a macroeconomic issue.

Immigration laws relaxed

This will lead to an increase in the supply of labor. Thus the costs will be reduced and the aggregate supply will increase. This will cause a shift in the supply curve. The issue is macroeconomic. Given below is a graphical illustration.

The Government Increases Spending

In this case, the aggregate demand curve will shift towards right as the demand is increasing. The GDP, however, will increase only if the economy is in the horizontal region of aggregate supply. The increase in demand is macroeconomic and is shown below.

Scenario 3

Foreign investments are of immense help to the developing countries as the countries don't have enough investments of their own. The foreign investments provide these countries with the capital goods and investments they require. This creates jobs and production possibilities for the developing country. The developing country starts having better economical conditions. These countries also begin to change the structure of their industries, imports and exports. Thus the country starts to develop itself after foreign investments. (Agosin and Mayer, 2000)

Of all the types, the foreign investment that best helps a country to improve its production possibilities is official flows and commercial loan. Official flow is the…