Suppose sharply lower coffee prices lead to a decrease in demand for tea. As tea prices decrease, tea producers experience short-run economic losses. If the tea industry is a price-taker industry and if sufficient time is allowed for the market to adjust fully to the decrease in demand for tea, one would expect the tea industry’s output to
a. increase and economic losses to increase as well.
b. increase and economic losses to disappear.
c. decline and economic losses to increase.
d. decline and economic losses to disappear.
i THINK IT IS (d)
Draw supply and demand curves for tea. Now decrease demand. What happens to Q?
To determine the correct answer, let's break down the scenario and analyze the outcome.
The scenario states that sharply lower coffee prices lead to a decrease in demand for tea. This implies that consumers are substituting coffee for tea because it has become relatively cheaper. As a result, the demand for tea decreases.
Now, when the demand for tea decreases, the tea producers will experience short-run economic losses. This is because the tea market is a price-taker industry, which means that producers have little control over the price and must accept the market price. With lower demand and potentially lower prices, the tea producers will face reduced revenue and may not be able to cover their costs.
However, the scenario also mentions that sufficient time is allowed for the market to adjust fully to the decrease in demand for tea. In the long run, industries can adjust their output levels to align with the new market conditions.
Given this information, the expected outcome is that the tea industry's output will decline and economic losses will disappear. This is because, in the long run, tea producers can reduce their output to match the lower demand, which will eventually align their costs with their revenue, eliminating the economic losses.
Therefore, the correct answer is (d) - decline and economic losses to disappear.