Tuesday, December 13, 2011

"A freeze in Brazil's coffee growing region will lower the price of coffee." Is this statement true or false, and why?

This statement is false.


If Brazil's coffee growing region experiences freezing temperatures (I'm assuming this hurts coffee plants just like any other plants), then there will be less coffee produced.  This, of course, leads to a reduction in supply.


A reduction in supply is represented on a graph by the movement of the supply curve to the left.  Assuming the demand curve remains constant, a reduction in supply leads to an increase in the equilibrium price of the good or service in question.


So, all other things being equal, a freeze in the coffee-growing region leads to an increase in the price of coffee.

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