Exploring the Economics of Espresso Coffee Market

Running head: ECO 100 INTRODUCTION TO ECONOMICS
ECO 100 Introduction to Economics
Name
University

ECO 100 INTRODUCTION TO ECONOMICS 2
Question One
a) Equilibrium quantity
The quantity demand and quantity supply are equal at equilibrium.
P = 200 – 0.4QD (1)
P = 20 + 0.5QS (2)
Demand = 200 - 0.4Q
Supply = 20 + 0.5Q
200 - 0.4Q = 20 + 0.5Q
200 – 20 = 0.5Q + 0.4Q
180 = 0.9Q
Quantity (Q) = 180/ 0.9
= 200 Kilograms
Since, Supply = Demand at equilibrium;
The price equation is P = 200 – 0.4Q
P = 200 – 0.4(200)
P= 200-80
P= 120
Therefore, the Equilibrium price = $120.
b) Supply and demand diagrams of apricots
The following figures for quantity demanded (Qd), and quantity supplied (Qs) were obtained
at indicated prices,
Price 0 20 40 60 80 100 120 140 160 180 200
Qs -40 0 40 80 120 160 200 240 280 320 360
Qd 500 450 400 350 300 250 200 150 100 50 0
The supply and demand diagram of apricots is presented as shown below

ECO 100 INTRODUCTION TO ECONOMICS 3
c) Calculate the consumer surplus, producer surplus, and total surplus, and indicate your
results on the diagram in part (b).
Calculations
i) Consumer Surplus is calculated by finding the area of the triangle marked in
the graph above (base x height)/2.
= (200 x 80) / 2 = $ 8,000
ii) Producer Surplus is calculated by finding the area of the triangle marked in the
graph above (base x height)/2.
= (200 x 100) / 2 = $ 10,000
iii) Total surplus = consumer surplus + Producer surplus
Consumer Surplus
Producer Surplus

ECO 100 INTRODUCTION TO ECONOMICS 4
= $ 8,000 + $ 10,000
= $ 18,000.
d) The price elasticity of demand at the equilibrium price and quantity
Equilibrium quantity (Q) = 200.
Equilibrium Price (P) = $120.
Therefore equilibrium point (Q, P) = (200, 120)
Price elasticity of Demand = change in price/ change in quantity.
Initial point (Q, P) = (200,120)
New point (Q, P) = (150, 140)
=
= 0.1667/ -0.25
Price elasticity of demand = - 0.668
If the price increase by 1%, the quantity demanded will decrease by 0.668%.
Point elasticity of Supply = % change in price% change in quantity
Initial point (Q, P) = (200,120)
New point (Q, P) = (240, 140)
=
= 0.1667 / 0.2
= 0. 8335
If the price increase by 1%, the quantity supplied will increase by 0.8335%.
e) i) Increase of price by 10%
A rise in price by 1% leads to a decrease in quantity demanded by 0.668%. Therefore, an
increase in price by 10% leads to a reduction of quantity demanded by 6.68%.
At equilibrium, Q= 200 and P = 120
10% increase in price = = 132
6.68% decrease in quantity demanded = = 186.8 or 187