How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium qu

Exercises · Q11

Q. How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

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Concept understanding — Supply And Demand Shift

The Everyday Intuition: Why Did My Chai Cost More Last Month?

Think about the chai-wala near your school. One month, a sudden cold wave hits your city. Everyone wants hot chai. The chai-wala can only make so many cups per hour. What happens? He might raise the price from ₹10 to ₹12. You grumble, but you still buy it because you're cold. That's demand shifting — more people wanting chai at every price.

Now imagine a different scenario: a truckers' strike makes milk and sugar expensive to transport. The chai-wala now has to pay more for his ingredients. He can't afford to sell chai at ₹10 anymore. He raises the price to ₹12 just to cover his costs. That's supply shifting — the cost of making chai has changed.

These two stories feel similar — price goes up in both — but the reason is completely different. And that difference is the entire point of this concept.

The Precise Meaning: What "Shift" Actually Means

In economics, demand and supply are not single numbers. They are schedules — a whole list showing how much buyers want (or sellers offer) at every possible price. We draw them as curves on a graph: price on the vertical axis, quantity on the horizontal.

A shift means the entire curve moves — left or right. This is different from a movement along the curve, which happens when only the price changes.

Important

Shift of the curve = a non-price factor changes (income, tastes, input costs, technology).

Movement along the curve = only the price changes.

Demand Shift

The demand curve shows: "At price ₹P, buyers want quantity Q." If something other than price changes how much people want, the whole curve shifts.

Rightward shift (increase in demand): At every price, buyers want more than before.

Leftward shift (decrease in demand): At every price, buyers want less.

What causes a demand shift? NCERT Class 12 (Introductory Microeconomics, Chapter 5) lists these factors:

Change in income: For normal goods, higher income → more demand at every price. For inferior goods (like cheap noodles), higher income → less demand.
Change in tastes/preferences: A health report praising green tea shifts its demand curve right.
Change in price of related goods:
- Substitutes (tea and coffee): If coffee becomes expensive, tea demand shifts right.
- Complements (petrol and cars): If petrol becomes expensive, car demand shifts left.
Expectations about future prices: If you think chai will cost ₹15 next week, you buy more today — demand shifts right now.
Number of buyers: More population → more demand at every price.

Supply Shift

The supply curve shows: "At price ₹P, sellers offer quantity Q." If something other than price changes their willingness or ability to sell, the whole curve shifts.

Rightward shift (increase in supply): At every price, sellers offer more.

Leftward shift (decrease in supply): At every price, sellers offer less.

NCERT lists these causes:

Change in input prices: Cheaper raw materials → supply shifts right. Costlier inputs → supply shifts left.
Change in technology: Better machines → produce more at same cost → supply shifts right.
Change in price of other goods (for multi-product firms): If a farmer can grow wheat or rice, and wheat price rises, they shift land to wheat — rice supply shifts left.
Expectations: If sellers expect higher prices next month, they may hold back stock today — supply shifts left.
Number of sellers: More firms enter the market → supply shifts right.
Taxes and subsidies: A tax on production shifts supply left (costs rise). A subsidy shifts supply right (costs fall).

Why It Matters: The New Equilibrium

The market price is determined where demand and supply curves intersect. That intersection is called equilibrium. When a curve shifts, the equilibrium changes.

Here is what happens in words (and you should draw this):

Case 1: Demand shifts right (increase in demand)

At the old price, there is now excess demand — buyers want more than sellers offer.
Sellers raise price. As price rises, some buyers drop out, and sellers produce more.
New equilibrium: Higher price, higher quantity. …

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Coffee and tea are substitute goods. A change in the price of coffee shifts the demand curve for tea, which changes both the equilibrium price and quantity of tea in the same direction as the demand shift.

The Concept: Substitutes and Demand Shifts

Coffee and tea are classic examples of substitute goods — products that can be used in place of each other. When the price of one substitute rises, consumers naturally switch to the other, increasing its demand. When the price falls, they switch back, decreasing demand for the other.

This is not about the supply of tea changing. The entire effect comes from a shift in the demand curve for tea, while the supply curve of tea remains fixed. The equilibrium moves along the supply curve to a new price-quantity pair.

Two Scenarios: Price of Coffee Rises vs. Falls

1. Price of Coffee Rises

Suppose the price of coffee increases. Coffee becomes more expensive relative to tea. Many consumers will substitute away from coffee and start buying tea instead. This causes the demand for tea to increase — the demand curve shifts to the right (from $D_0$ to $D_1$ ).

At the original equilibrium price of tea, there is now excess demand. Sellers respond by raising the price. As the price rises, quantity supplied increases along the supply curve. The new equilibrium is at a higher price and a higher quantity of tea.

Watch out

Do not confuse a movement along the demand curve (caused by a change in tea's own price) with a shift of the demand curve (caused by a change in the price of a related good like coffee). Here, the demand curve shifts; the movement along the supply curve is the result of that shift.

2. Price of Coffee Falls

Now suppose the price of coffee falls. Coffee becomes cheaper relative to tea. Consumers who previously drank tea may switch to coffee. This causes the demand for tea to decrease — the demand curve shifts to the left (from $D_0$ to $D_2$ ).

At the original equilibrium price, there is now excess supply. Sellers lower the price to clear their stock. As the price falls, quantity supplied contracts along the supply curve. The new equilibrium is at a lower price and a lower quantity of tea.

The Diagram (Described in Words)

Imagine a standard demand-supply graph for the tea market. The vertical axis is the price of tea ( $P_T$ ), the horizontal axis is the quantity of tea ( $Q_T$ ). The supply curve ( $S$ ) is upward sloping. The initial demand curve ( $D_0$ ) intersects $S$ at point $E_0$ , giving equilibrium price $P_0$ and quantity $Q_0$ .

When coffee price rises: The demand curve shifts right to $D_1$ . The new intersection with $S$ is at $E_1$ , with a higher price $P_1$ and higher quantity $Q_1$ . …

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Q.How will a change in price of coffee affect the equilibrium price of tea? Explain the effect on equilibrium quantity also through a diagram.

The Concept: Substitutes and Demand Shifts

Two Scenarios: Price of Coffee Rises vs. Falls

1. Price of Coffee Rises

2. Price of Coffee Falls

The Diagram (Described in Words)

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