Article: Tea Prices Leap as Production Falls by Lucy Craymer

1. Draw and label a graph that depicts the demand for and supply of tea leaves. Indicate the equilibrium price and quantity of tea leaves and assume that the market price is equal to the equilibrium price.

2. Refer to the graph you drew to answer the previous question. From the article: "In August, tea prices...hit a record high. The shortage has been compounded by severe flooding in... northeastern India, which produces the bulk of the country's tea..." Assume that the sole reason for the high prices in August is the flooding in India described in the article. Explain how this would be shown in your graph.

3. When there is a shortage of tea leaves, is the demand for tea leaves greater than the supply of tea leaves? Briefly explain why or why not.

4. From the article: "Tea plantations in the country have seen better rainfall in recent weeks...Dilhan Fernando, chief executive of...Sri Lankan tea producer Dilmah Tea [stated] 'At the moment it's bucketing down and the sky's looking ominously gray...The rain means we've got the possibility of a significant increase in output.'" Would an increase in the supply of tea leaves affect the demand for leaves or the quantity demanded of tea leaves? Briefly explain your answer.

5. From the article: "In Sri Lanka and India, leaves are largely picked by hand from evergreen shrubs... Tea leaves typically take about two weeks to grow before they are ready for picking..." Assume that it would take two months before tea leaves are ready for picking. Would the supply of tea leaves be more or less elastic after two weeks than it would be after two months? Briefly explain.

6. From the article: "Earlier, an oversupply forced some companies to sell bulk tea leaves at less than what it cost to produce the commodity..." What is another name for an oversupply? When there is an oversupply of a product will the equilibrium price of the product change? Briefly explain your answer.