Chapter 2R, Problem 3CTQ

To determine

The question requires us to determine the reason which causes the selling of coffee to rise at the higher price and also determine the impact of price floor on coffee supplied and demanded in the market.

Explanation of Solution

Generally, consumers are willing to purchase a product at a higher price when the product is either a necessity good or a Giffen good.

To help the farmers' people think that buying fair trade coffee is necessary, then people are willing to buy the coffee even at the higher price. So, the necessity factor will support the sellers to sell some coffee at a higher price.

The following graph will show the impact of a law that is preventing the price of coffee to fall below the fair-trade price:

  

Here, E represents the initial equilibrium point in the market where Q* is the equilibrium quantity, and P* is the equilibrium price.

At the equilibrium price, P*

Quantity demanded = Quantity supplied = Q*

Later, a law sets the fair-trade price Fp higher than the equilibrium price (P*). At this higher fair-trade price, the quantity supplied (Qs) is higher than the quantity demanded (Qd).

When Qs is more than Qd, the market represents the situation of surplus in the economy.

So, at a fare-trade price market will face a surplus of coffee.