Principles of Macroeconomics

2021-05-13 17:30:20
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Coffee experienced gradual growth in demand for a long period while supply did not grow as fast because of the time needed for coffee to mature. This resulted in very high coffee prices. However, by this time, the demand had reached a plateau. Attracted by the high coffee prices, production increased and there was an oversupply in the market. This resulted in a drastic drop in market prices because supply outstripped demand. This resulted in the production costs becoming higher than the market price for coffee. According to the law of supply and demand, an increase in demand without a change in supply leads to higher prices. The high prices attract more suppliers keen to share in the lucrative trade. An increase in supply without a change in demand eventually leads to the market price going down (Mankiw, 2012).

Gourmet coffee retailers emerged during this period. Their prices were high as they targeted the high-end customer. During this period, supply and demand remained largely unchanged. Because of the oversupply in the market, the gourmet retailers were able to purchase coffee from the market at very low prices. However, they continued to charge a premium for their sales. This allowed gourmet coffee retailers to make supernormal profits out of coffee sales. However, because of being located in high-end locations, rent costs were significantly higher than normal outlets. Part of the supernormal profits therefore covered the increased operation costs. However, such outlets were still able to do much better in the market compared to normal coffee sellers.

Chart 1: Demand and supply chart

The demand and supply curves showing the equilibrium price and quantity where the two curves intersect.

Scenario 2

Microeconomics is economics at an individual level while macroeconomics is study of economics at an industry or countrywide level. Microeconomic factors will usually result in a movement in the supply and demand while macroeconomics will result in a shift in the supply and demand. The development of the microchip is a macroeconomic issue. Before the development of the microchip, computers were made using transistors. These were very expensive to manufacture, consumed a lot of energy, and required a lot of space. Computers made using transistors were therefore inefficient, bulky, and very expensive. The microchip was developed using a board that could contain thousands of circuits on a single chip. The development of the microchip resulted in a drop in the cost of developing computers across the whole computer industry. This affected the supply of computers. Before the development of the microchip, cost was the main factor limiting the demand of computers. After the cost went down, there was an increase in demand. This resulted in a shift in supply and demand. Furthermore, because of the development of the microchip, the cost of computers went down while the demand went up.

Polyester suits becoming trendy again is a microeconomic issue. When the suits were not trendy, demand went down. When demand goes down, the prices also go down in an attempt to attract more people to buy them. If this is not successful, supply decreases. If the polyester suits become trendy again, supply will be low because of the suppliers reducing production initially. Because of the low supply and increased demand, the prices will quickly rise to an abnormally high level (Hall & Lieberman, 2010). This results in a movement in the supply and demand curve. As the demand rises, suppliers will increase production in order to meet demand. The increased supply will eventually result in prices settling down at a price that is lower than the abnormal high price during initial demand but significantly higher than during the period when demand was low (Jones, 2014).

 

Chart 2: Demand quantity and price relationship

 

References:

Hall, R. E., & Lieberman, M. (2010). Macroeconomics: Principles & applications. Australia: South-Western Cengage Learning.

Jones, C. I., & W. W. Norton & Company. (2014). Macroeconomics. New York: W. W. Norton Company.

Mankiw, N. G. (2012). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.

 

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