Question

QUESTION 1
Coffee is now the second most traded commodity in the world after crude oil. Not only has demand for various coffee products risen sharply in Western countries in recent years, increasingly there is also greater taste for coffee drinks in developing countries such as China and India. In addition, by-products of coffee beans have become popular such as coffee leaves which can be used to brew a tea with known health benefits. However, as a natural produce, coffee plants are subject to weather conditions. Recently major producers such as Brazil have been plagued by droughts. Using the demand-supply model, explain the likely effects of these phenomena in the coffee bean market. How can a market analyst use this information to her advantage?

Answer 1

The demand for the Coffee bean is very high in the international market (it is the second most traded good in international market after Crude oil) this is because of the variety of uses of the coffee bean and its by products all over the world. In the recent times it has been seen that the demand for coffee bean is high because in addition to the large demand in the Western Countries its demand is now increasing in the developing countries such as China and India.

But the production of the Coffee bean is subject to weather conditions because it is a natural produce. But it has been seen that the major producers of coffee bean like Brazil have been plagued by drought. This will decrease the supply of the coffee bean in the international market.

The effect of both of these phenomenon on the international market for coffee bean can be seen from the following graph.

It can be seen from the graph that the previous demand and supply of the coffee bean( before drought) is D and S which intersects at e and hence the price and quantity is determined as P and Q respectively.

Now the supply of the coffee bean is decreased in the foreign market due to the drought in coffee producing countries. So the supply curve shifts to the S1, but the demand is same at D. Now the new supply curve intersect the old demand curve at e1. So the new equilibrium price is P1, which is higher than P and the equilibrium quantity of coffee bean is decreased from Q to Q1.

If a market analyst comes to know about the situation by studying the market, she can use this information to make maximum profit for her firm. She can do it by storing excess stock of coffee bean by selling less now, and after the prices increase due to lack of supply, her firm can earn more profit by selling the coffee beans purchased earlier at lower prices now at higher prices when the price has increased in whole market.