Impact Of Natural Disaster On Coffee Supply And Effects Of Taxation On Market Equilibrium

Understanding Market Equilibrium

Answer:

1. The Production Possibility Frontier (PPF) for the manufacture of cars and bicycles are shown in the figure given below:

Figure 1: PPF of cars and bicycles

Source: (author’s creation)

1. The PPF indicates maximum possible output of two goods provided the inputs. It assumes that  each input is efficiently utilized in total production. Some of the variables such as workers, emerging technologies influence the resources in PPF (Baumol and Blinder 2015). This curve aids in determining efficiency to manufacture two commodities at one time.

The above figure shows the PPF curve for manufacture of bicycle and cars. Point X and Y on the PPF curve indicates that all the resources are properly allocated by a country. Point X denotes that if a country wants to manufacture more cars than bicycle, then few resources must be diverted for producing bicycles. On the contrary, point Y depicts that if one country wants to manufacture larger number of bicycles, then few resources should be given up for manufacturing cars. Moving from point X to point Y, the country will decline production of cars with respect to increase in production of bicycle. The point Z indicates inefficient allocation of resources, which means that this nation is manufacturing lesser number of both cars as well as bicycles even if resources are available.

• Technology that is used for producing commodities is assumed to be fixed
• All the resources in production are used in efficient way (Hall and Lieberman 2012).
• Resources utilized for production of one good must be relocated to manufacture another good.

• This curve is generally negatively sloped since change in one good inversely relates to change in another good (Rios, McConnell and Brue 2013).
• PPF curve is concave shaped owing to increase in its marginal opportunity cost.

1. The three possibilities at which Newland can meet increase in total demand includes-

• Newland might introduce emerging technologies to meet rising product demand
• Newland must increase its total supply of goods for meeting increasing customers demand
• Import of the products will aid this country to meet rising demand of the above mentioned products and thereby will raise its total supply (Sloman Norris and Garrett 2013).

Part 1

The demand and supply function for pizza are given as-

Q^D=20-2P

Q^s= P-1

Market equilibrium occurs when demand becomes equal to supply, Q^D=Q^s

20-2P=P-1

2P+P=21

3P=21

P=7

At equilibrium price= 7, Q^d=20-2*7=14 and Q^S=7-1=6

The graph for market equilibrium is given below:

Figure 2: Market equilibrium for Pizza

Source: (Author’s creation)

After imposition of tax of $3 per pizza by the government, the demand and supply function will be-

Q^D=20-2(P+3)

Q^S=P-1

Now the market equilibrium will be-

Q^D=Q^S

20-2(P+3)=P-1

3P=15

P=5

Thus, at this price, Q^D= 4 and Q^S= 4. The market equilibrium diagram after tax imposition is shown below:

Figure 3: Market equilibrium after imposition of tax

Source; (Author’s creation)

Tax incidence depicts distribution of the tax obligations, which might be covered by purchasers and sellers (Frank and Cartwright 2013). This will reveal that which particular purchasers and sellers will provide this price of tax. After the tax imposition, new price will be $7 per pizza. This signifies that sellers will pass push this burden to the purchasers, who will now have to give $1extra per pizza. On the other hand, retailers will gain $2 less for each pizza they sells.

Tax usually generates deadweight loss since it restricts individuals from buying such goods which cost more after tax imposition. However, deadweight loss signifies the loss of commodities that mainly occurs because of tax imposition.

Deadweight loss occurred by tax-

DWL= ½*(Base*Height)=3

Figure 4: Deadweight loss created by tax

Source: (Author’s creation)

Part 2

The equilibrium in the market occurs when demand curve cuts the supply curve (Franko 2017). The figure below reflects that at market equilibrium, corresponding equilibrium price is $250 and quantity is 1000. As the domestic wheat price has been set at $300 that is above the market equilibrium point, total supply becomes larger than total demand. Hence, this creates surpluses and thereby equilibrium price will reduce while quantity will rise.

Effects of Taxation on Market Equilibrium

Figure 5: Effect on market equilibrium

Source: (Author’s creation)

1. The below diagram indicates producer surplus, consumer surplus and deadweight loss. The triangle

Figure 6: Figure showing Consumer surplus, producer surplus and deadweight loss

Source: (Author’s creation)

1. Consumer surplus signifies welfare measurement at which every individual requires to obtain maximum amount from consumption of goods (Mankiw 2014). It is estimated as-

	Consumer Surplus
	Qd	Price change
	800	400
	0	300
CS	40000

Producer surplus relates to excess amount that the sellers gain from selling commodities in marketplace (Reisman 2014). 

	Producer Surplus
	Area of rectangle
	Length	Breadth
	300	800
	200	0
	80000
	Area of triangle
	Height	Base
	200	800
	100	0
	40000
PS	120000

DWL= ½*(P2-P1)*(Q1-Q2)

	Deadweight loss
	Height	Base
	200	1000
	300	800
DWL	-10000

The result of the US farm Bill is unfair because of creation of deadweight loss. Moreover, it is also reflected that since surplus is created in marketplace, the government will have to face issues since consumption will not rise.

The total production of coffee requires good climatic condition. As natural calamities hampers production of coffee , it creates deficiency in total supply. This is illustrated in the diagram below:

Figure 7: Effect of natural calamities on coffee supply

Source: (Author’s creation)

The above figure shows that equilibrium occurs at E in which demand DD and supply SS cuts each other. Correspondingly, the equilibrium price is P and quantity is Q. Since natural calamities hinders coffee production, the supply curve shifts to left from SS to S1S1 and thus equilibrium price is P1  and quantity is Q1.

Deficiency in coffee supply influences the world market. Increase in total demand causes rise in price and quantity in this market while supply crisis causes rise in price and decline in quantity. Hence, it can be seen that quantity is ambiguous because of opposing forces. For these three diagram are drawn , in which demand and supply curves are indicated by DD and SS . The equilibrium price is P and quantity is Q.

Case i

Increase in world demand exceeds decrease in supply and thus leads to reduction in price and quantity

Figure 8: Increase in demand exceeds reduction in supply

Source: (Author’s creation)

Case ii

Increase in demand becomes less than reduction in supply. Hence, price increases and quantity declines.

Figure 9: Decrease in supply exceeds increase in total demand

Source: (Author’s creation)

Case iii

Change in both demand and supply is equal. Hence, price increases but total quantity remains constant.

Figure 10: Equal change in demand and supply of coffee

Source; (Author’s creation)

1. Assuming that trial of specie becomes highly successful, world coffee supply will apt to rise. This increase in total supply will also rise total demand (Taussig 2013). Hence, equilibrium price and quantity will increase. The three cases are illustrated below

Figure 11: Demand is less than supply

Source; (Author’s creation)

Case ii

Supply is lesser than demand force, thereby leading to rise in price and quantity.

Figure 12: Demand is more than supply of coffee

Source: (Author’s creation)

Both Demand as well as supply of coffee change in same magnitude. Hence, quantity increases and price remains unchanged.

Figure 13: change in supply and demand is equal

Source: (Authors creatiobn)

References

Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.Franko, P.M., 2017. Principles of Microeconomics.

Frank, R. and Cartwright, E., 2013. Microeconomics and behaviour. McGraw Hill.

Hall, R.E. and Lieberman, M., 2012. Microeconomics: Principles and applications. Cengage Learning.

Mankiw, N.G., 2014. Essentials of economics. Cengage learning.

Reisman, D., 2013. The Economics of Alfred Marshall (Routledge Revivals). Routledge.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Sloman, J., Norris, K. and Garrett, D., 2013. Principles of economics. Pearson Higher Education AU.

Taussig, F.W., 2013. Principles of economics (Vol. 2). Cosimo, Inc..