Analysis of Economic Effects: Demand, Supply, and Market Structures

This report examines the economic effects of price changes on both demand and supply, using the coffee industry as a case study. It analyzes the factors influencing the shape of the demand function, including the relationship between quantity demanded and price, as well as the concept of elasticity. The report then explores changes in supply and demand, deriving equilibrium prices, output, and revenue under different scenarios. Furthermore, it delves into pricing strategies across different market structures (perfect competition, monopolistic competition, and monopoly) and their implications for a coffee shop business. Finally, it assesses the impact of interest rates on business operations, considering the effects of government spending and private investment on the business units in different states. The report concludes by summarizing the key findings and emphasizing the importance of understanding economic principles in business decision-making.

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Table of Contents
Introduction......................................................................................................................................2
Factors influencing the shape of the demand function....................................................................2
Changes in Supply and Demand......................................................................................................4
Management roles............................................................................................................................6
Effects of interest rate on business operations.................................................................................7
Conclusion.......................................................................................................................................8
Introduction
The purpose of this report is to consider the economic effects of changes in quantity demanded
as a result of the increase in price as well as changes in quantities supplied as a result of the
changes in price.
Coffee industry
Demand function 200 - 30 p
Supply function 100 + 20 P
At equilibrium = QD = QS

200 - 30 p = 100 + 20 P
100 = 50 p
P = 2
= QD = QS
= 200 - 30 (2)
= 140
Factors influencing the shape of the demand function
One factor that influences the shape of the demand function is the relationship of the quantity
demanded and the price. If the quantity demanded and the price have a negative relationship, the
demand curve will have an inverse slope. The other factor affecting the shape of the demand
curve is the level of elasticity. This means that a product with high elasticity of demand will have
a higher slope than a product with less elasticity of demand.
The demand elasticity one price interval above the equilibrium price
Elasticity = % Change in quantity/ % Change in price
P = 3
Qd = 200 - 30 (3)

Qd = 200 – 90
Qd = 110
% Change in quantity = 110 – 140 / 140
= - 21%
% Change in price = 3-2/2
= 50%
Elasticity of demand = - 21%/50%
= - 0.43
The demand elasticity one price interval below the equilibrium price
Elasticity = % Change in quantity/ % Change in price
P = 1
Qd = 200 - 30 (1)
Qd = 200 – 30
Qd = 170
% Change in quantity = 170 – 140 / 140
= 21%

% Change in price = 3-2/2
= 50%
Elasticity of demand = - 64%/50%
= 0.43
Changes in Supply and Demand
2

 The market you described in Phase 1 has only one period, which we designate t-2 (e.g.
2016). But economies are not static
 In t-1 (e.g. 2017), industry demand increases - the position of the demand curve changes
(shifts to the right), but the slope of the curve does not change
 In t0 (e.g. 2018), industry supply increases - the position of the supply curve changes
(shifts to the right), but the slope of the curve does not change
Requirements
2.1 For t-1, derive the equilibrium price, equilibrium output and revenue
In t-1, the demand increases while the supply remains the same. In this case the price increases to
level 3
The new quantity demanded at equilibrium becomes
200 – 30(3)
D1
D2
1
S1
S2

= 110
The equilibrium revenue = 110* 3 = 330
2.2 For t0, derive the equilibrium price, equilibrium output and revenue
In t-1, the supply increases while the demand remains the same. In this case the price decreases to
level 1
The new quantity demanded at equilibrium becomes
200 – 30(1)
= 170
The equilibrium revenue = 170* 1 = 170
Pricing in different markets
Information
 You have acquired a firm that operates in three states: New South Wales (NSW),
Queensland and Tasmania
 The shape (but not the position) of the industry demand curve is the same in each state.
However:
• In NSW, the market exhibits perfect competition – there are many firms producing the
same product

• In Queensland, the market exhibits monopolistic competition – there is a handful of firms
selling similar but not identical products
• In Tasmania, the market is a monopoly – you are the only seller and your product has no
close substitutes
• The name of the firm and the product it is supplying
The firm is called GititWell
The firm is a coffee shop which sells coffee and treats
Company is owned under a corporation
The business is an independent operation
Management roles
CFO – it is the role of the CFO to ensure that the financial policies and procedures of the
company are well followed and relevant to the business model of the company. It is his role to
make financial proposals and decisions that will benefit the growth of the company.
Marketing director – it is the role of the marketing director to ensure that the business is well
known among the residents of the different states and to initiate any marketing strategies he
deems fit.
Production manager – It is the role of the product manager to ensure that the production
processes of the coffee are streamlined and are in best quality
• The team member responsible for operations in each state

The CFO will be responsible for NSW, this is because at this market it will be necessary to
ensure that the business is a cost leader
In Queensland the marketing director will be best suited since it will be important the business
competes on its differentiating qualities
In Tasmania, the product manager will be responsible since there will be need to standardize
product quality
 Based on the shape of the industry market in t0 (described in Phase 1):
Expenses are 30
• What price will you charge and what will be your output and profit in each market?
For the perfect competitive market, price 2 will be a good price since it is the equilibrium price at
the market.
200 - 30 (2)
140
Profit = 140 (2) – 30 = 250

For the monopolistic market, price 2.5 will be best this is because there are few firms and
therefore there is price flexibility to raise the price higher than the equilibrium market price but
still not so high to allow the other firms to undercut the business.
200 - 60 (2.5)
200 – 150
= 50
Profit = 50 (2.5) – 30 = 95
For the monopoly market, price 3 would be best. This is because being a monopoly, the business
will have flexibility to set the price as it would like.
200 - 5 (3)
= 185
= 185 * 3 – 15
= 525
Effects of interest rate on business operations

 What effect will this have on the rate of interest?
Increased government spending will mean that there more borrowing by the government to
finance the budget deficit. The increase in borrowing is likely to push up the interest rates.
 What effect will the change in the rate of interest have on private consumption and
private investment?
Increase in the interest rate will mean that the private sector investment will decrease since it will
be quite expensive to make investments in the country.
 How will this affect decisions of your three business units?
For the NSW business unit – it is bound that the units demanded will decrease. It may therefore
be necessary to reduce the prices in order to attract individuals from the public sector.
For the Tasmanian unit, it would be necessary for the business to hold off on the investment and
look into the public consumers as well.
For the Queensland unit, it will be necessary to increase the amount of customers that they have
in the public sector and deprioritize the private sector.
Conclusion
It is clear that changes in price have an effect on the quantity demanded and quantity supplied. In
terms of demand, increase in price reduces the price especially if the market is perfectly
competitive. In terms of supply the increase in price increases the supply of the produce. Also
other factors may influence the quantity demanded such as the market structure in that if the

market is monopolistic, there is likely to be a less than proportionate change in the quantity
demanded when a price increase is experienced.