The market equilibrium price for coffee beans in Ecuador is $2.75/pound, a price at which growers are unable to make a profit. Due to the lack of profits, many growers have stopped production and the output of coffee beans has fallen from 400 tons per year (capacity for the region) to 250 tons per year. As a result of pleas from the growers, the government steps in and sets a floor price for coffee beans at $3.50/pound. What market response would you expect from this government action? How would supply, demand, and price change? Use a graph to illustrate your answer.
When the government sets a floor price for coffee beans at $3.50/pound, we can expect a market response that affects both supply and demand.
First, let's analyze the impact on supply. Previously, at the market equilibrium price of $2.75/pound, growers were unable to make a profit, resulting in a decrease in coffee bean production from 400 tons to 250 tons per year. With the introduction of the floor price, growers now have a guaranteed minimum price for their beans, which can incentivize them to resume production or increase their output. Therefore, we can expect an increase in the supply of coffee beans.
On the other hand, let's consider the impact on demand. The floor price set by the government may lead to an increased price for coffee beans, which could potentially discourage some buyers or lead to a decrease in demand due to the higher cost. As a result, we can expect a decrease in demand for coffee beans.
Now, let's illustrate these expected changes in supply and demand using a graph. The graph will have the quantity of coffee beans (in tons per year) on the horizontal axis (x-axis) and the price per pound of coffee beans on the vertical axis (y-axis).
Initially, at the market equilibrium price of $2.75/pound, the supply curve and demand curve intersect, determining the equilibrium quantity of 400 tons at the equilibrium price. However, this price is below the production cost for growers, leading to a decrease in supply and a decrease in output to 250 tons.
With the introduction of the floor price at $3.50/pound, the supply curve shifts to the right (to a new position) since growers now have an incentive to produce more at this higher price. However, the demand curve shifts downward since some buyers may be deterred by the increased cost.
As a result, the new equilibrium point will have a higher price and a quantity greater than the initial equilibrium due to the increased supply, but lower than the initial quantity due to the decreased demand. However, the exact position of the new equilibrium will depend on the magnitude of the shifts in supply and demand.
To visualize this graphically, please refer to the graph below:
```
Price ($/pound)
/ Demand
/ .
/ .
/ .
/ .
/ .
/ .
/___________________ Supply (after floor price)
\
\
```
In summary, the government's introduction of a floor price for coffee beans would lead to an increase in supply and a decrease in demand. This would result in a new equilibrium with a higher price and a quantity that is greater than the output under the previous conditions but lower than the initial equilibrium quantity.