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This paper was prepared for [INSERT COURSE NAME], [INSERT COURSE ASSIGNMENT] taught by [INSERT INSTRUCTOR’S NAME].
Part A
Winter starts and the weather turns sharply colder.
The demand for the hot chocolate will increase while the supply at first remains the same. An increase in the price of hot chocolate shall arises from scarcity of hot chocolate that in turn arises from increase in price. An increase in the price leads to an increase in the supply.
Graphically increase in the prices of hot chocolate only leads to changes along the same curve; this causes the supply curve to shift upwards
P1 p0 S2 S1 D0 Q
Part B
The price of tea, a substitute for hot chocolate, falls.
When the price of tea drops, the demand for hot chocolate will drop as well since people can easily get the substitute at a cheaper price, they will opt for the tea. A reduction in the demand for hot chocolate, will lead to the a reduction in the quantity supplied. The price of the hot chocolate will fall as well.
If there is a fall in price in the subsitiute the demand changes, this leads to to the demand curve leftwards from D0-D1 and price falls. D0 S0
D1
P0
P1
Part C
The price of cocoa beans decreases.
When the price of the cocoa beans decrease, the price of chocolate decreases also. This is because it costs much less to make and supply chocolate to the market. This is because cocoa is the primary input in production of chocolate, this decrease in the price will lead to an increase in the demand for hot chocolate.
Increase in the supply will lead to a shift in the supply curve from S0 – S1 and the price decreases from P0 – P1 S0
P0 S1
P1
Q
Part D
The price of whipped cream falls.
We have several complimentary goods this includes whipped cream. A complimentary good is one which is consumed together with hot chocolate, a fall the price of a complementary good leads to an increase not only in its own demand but also an increase in the demand of the good it complements.
This will lead to a shift in the demand curve from D0 – D1, and an increase in the price of the hot chocolate from P0 – P1
D0 D1 S0 P1 P0
Part E
A better method of harvesting cocoa beans is introduced.
When there is a better method of harvesting cocoa, then it means that the quantity of cocoa available for the production of hot chocolate, an increase in the supply quantity of hot chocolate will lead to a fall in the prices and this will lead to increase in the demand for the hot chocolate.
The increase in cocoa supplied will shift the supply curve downwards as the price fall due to excess supply.
S0
P0 S1
P1
Q
Part F
The Surgeon General of the U.S. announces that hot chocolate cures acne.
If the surgeon general would announce that chocolate cures acne all teenagers would go out there to get it and the demand of the chocolate would increase rapidly. This would lead an increase in the price of the chocolate.
Graphically the demand curve would shift upwards from D0 –D1 and consequently the price increases from P0 – P1
D0 D1 S
P1
P0Part G
Gallons of milk been dumped that leads to an increase in the price of milk.
This would automatically lead lower demand of chocolate from the rising prices of milk this is because milk is a good that is consumed together with chocolate. When the price of milk rises, its demand decreases and so does the demand of all the goods that are consumed together with it in simpler words called accompaniments.
When the demand for chocolate decreases, the demand curve shifts to the left and the price falls, from P0 – P1
D1 D0 S P0 P1 Q
Part H
Consumer income falls because of a recession, and hot chocolate is considered a normal good.
For a normal good a fall in the income of the individuals leads to a decrease in the quantity demanded of the good. This means that the quantity of hot chocolate demanded will reduce, the price will then fall and finally the quantity supplied to the market will reduce.
A reduction in income leades to a decrease in demend since purchasing power has been reduced. Thus the demand curve shifts to the left and there is also a fall in the prices from P0 – P1
D1 D0 S P0 P1 Q
Part I
Producers expect the price of hot chocolate to increase next month.
When producers are expecting the prices of chocolate to increase, then they will choose not to supply their current amount to the market so as to wait till when the prices are high to get more profits from the sale. This will create an artificial shortage of chocolate and due to the scarcity the price will increase due to the increased level of demand.
The price will increase from P0 – P1 and the demand curve will shift as well from D0 – D1
D0 D1 S P1 P0 Q0 Q1 Q
Part J
Currently, the price of hot chocolate is $0.50 per cup above equilibrium.
In a situation where the price of a commodity is above equilibrium by acertain amount, then it means that the market does not clear because it is sold at a higher price than expected, and more than the consumers are willing to pay.
This means the sales are low because only a smaller percentage of the population are willing to consume the hot chocolate at that price. Let us assume that P0 is the equilibrium price while P1 is the equilibrium price plus 0.5 dollars, then;
D S1 S0
P1
P0 Q1 Q0 Q
PART II: Reflection paper
Economics is not a physical science, it is a social science that deals with the reasons behind the actions that people take when it comes to issues to do with finances and commerce (Wanniski, 1978). Keynes is famous for being a notable economist who came up with theories that explain the behavior of consumers at micro level and that of the country at the macro and aggregate level. He states that economics is the study of assumptions that rationalize the behavior of the individual.
Just like any other science we need to put our guinea pigs under controlled environment in order to see how he reacts. In this case our guinea pig is the individual, consumers are largely known to be subjective but we need them to be objective in making decisions. This is why I believe that economics is the study of a caged consumer who is put under specific conditions and studied to be able to come up with the best way out.
Criticism in scholarly disciplines is highly accepted because it usually brings to life another theory and perspective, a good example is the Cambridge theory of demand for money which was as a result of the criticism of Keynes theory of demand for money, that is highly acceptable however criticism that seeks to look for irregularities in theories without coming up with an alternative is unacceptable (Wanniski, 1978). One cannot criticize something yet they have nothing better to offer. As much as economics is about rationalization, we cannot forget that we are dealing with human beings and emotions and desires are an essential part of being human. Sometimes we pick the less recommendable choice.
The one critic that stands out is all the calculations that has been established, to many people this is complicating the way in which people make decisions, but to economists this is simplifying by coming up with a model that can be used for prediction.
As much as we would like to confidently want to say that all the theories and models can be used in predicting the real life that is not true. They seem to only make sense when in theory but practically they do not apply. This is because all the major aggregate predictions that were made by famous economists almost all of them did not come true. There is also not enough data to back up all the theories that exists. This means that something urgent needs to be done in order to prevent economics from falling. The universities have been trying by putting their best foot forward, this is by incorporating some contemporary issues into the syllabus like introduction of units like urban economics, economics of micro finance, industrial economics and international economics.
This means that there is a lot of room for improvement for the current economists. They should all start from the beginning; the earlier economists set a good foundation on which they can build on. Some of the data that exists is not enough and some does not relate to the contemporary society. In the calculations they need to come up with new models that can easily predict the society, this is by changing the intercepts and lemmas used. This will ensure that the models can easily be used in today’s world.
Economics is a very essential part of everyday life, the critics may not be there to eliminate, but to get it to improve and upgrade the society by helping in making wise investment decisions.
References
- Wanniski, Jude. (1978), The Way the World Works; How Economies Fail and Succeed, Orthodox Press, New York
