What happens to the price and the quantity bought and sold...

What happens to the price and the quantity bought and sold in the cocoa market if countries producing
cocoa experience a drought and a new study is released demonstrating the health benefits of cocoa? Illustrate your answer with a demand and supply graph.

Key Concepts

Combined Effects on Market Equilibrium

When both a supply shock (due to a drought) and a demand shock (due to improved health perceptions) occur simultaneously, both yield an upward pressure on price. However, their impacts on quantity are conflicting: a decrease in supply tends to lower the quantity traded while an increase in demand tends to raise it, leaving the final change in equilibrium quantity ambiguous depending on the relative strength of each shift.

Supply Shifts

A supply shift occurs when an external factor or shock affects the production or availability of a good, independent of its price. For example, a drought in regions where cocoa is produced reduces the supply, shifting the supply curve to the left. This leftward shift typically leads to a higher equilibrium price and a lower equilibrium quantity, assuming demand remains unchanged.

Supply and Demand Model

The supply and demand model is a fundamental framework in economics used to determine the market equilibrium price and quantity of a good or service. It involves the interaction of the supply curve, which represents producers’ behavior, and the demand curve, which captures consumers’ behavior, with the intersection of these curves indicating the equilibrium state of the market.

Demand Shifts

A demand shift happens when non-price factors, such as consumer preferences or new information, influence the quantity of a good demanded. When a study reveals health benefits of cocoa, it increases consumer interest and demand, shifting the demand curve to the right. This rightward shift generally results in a higher equilibrium price and a higher equilibrium quantity, if supply is constant.

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