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Public/Private Decisions Price Levels and Supply/Demand


Scenario One






Scenario Two


- After Hurricane Katrina, what happened to the price of fish?
- After the development of the microchip, what happened to the price of computers?
- Polyester suits have become trendy again. What happens to their price?
- A new health report came out that said red wine lowers cholesterol.
- The government raises taxes.
- Inflation increases.
- Immigration laws are relaxed.
- The government increases spending.

Scenario Three


Discuss what type of foreign investments would be best for the economy's PPF. What are the opportunity costs of these decisions?

Include what will happen to private and public choices as the economy grows. Support your discussion of these issues and consequences using at least 2 graphs.

Solution Preview

Scenario One

In scenario one, when there was an overproduction of coffee, the demand remains the same but there is an increase is supply. When there is such a situation there is a right shift in market supply. This leads to an increase in the quantity demanded and a decrease in price. Next, when the gourmet coffee houses began appearing and charging a premium for coffee, there is a change in demand in the period and the demand increases. The demand curve shifts to the right and at the same price more quantity is demanded.

In the graph one both these effects are illustrated:
When the supply of coffee increases, the supply curve shifts from position S0 to S1. This leads to a decline in price to Price 1. After this, when the demand increases and the demand curve moves from position D0 to D1, there is an increase in price to Price 2. When the gourmet coffee houses began selling coffee to high rent areas and high income consumers, the effect is that because of high income of coffee drinkers, the demand for coffee increases. The demand curve shifts to the right and at the same price more coffee is demanded. This increases the quantity of coffee at equilibrium and also the price of coffee at equilibrium. When the wholesale prices begin increasing because of shortages caused by poor weather and higher market prices, the supply of coffee falls and the supply curve moves to the left. This means that the same quantity is available at higher prices and that the supply of coffee has decreased.

On the second graft, when the coffee houses tend to open in high rent areas, the demand increases or the demand curve D1 moves to D2. The new price is Price 3. This price is the new ...

Solution Summary

The response provides you a structured explanation of shifts in demand and supply curves . It also gives you the relevant references.