Question

In late 2004 and early 2005, the price of raw coffee beans jumped as much as 50% from the previous year. In response, the price of roasted coffee rose about 14%. Similarly, in late 2014 and early 2015, the price of raw beans fell by about 25%, yet the price of roasted coffee fell by only a few percentage points. Why did the roasted coffee price change less than in proportion to the rise in the cost of raw beans?

Answer 1

In 2004-05, price of the raw coffee beans rose by 50%. In other words, the input price increased for firms, but the price of roasted coffee increased by only 14% (price of the end product did not increase by the same percentage). Similarly, in 2014-15, price of the raw coffee beans fell by 25%(input price decreased); but the price of roasted coffee fell by only a few percentage points(the firms could sell it only by a few percentage lower).

This is because the firm's supply curve is relatively inelastic but the demand curve is relatively elastic. Therefore, the firm cannot sell the roast coffee beans at the same percentage change as the change in raw coffee beans that it purchased as its input. It would lose its customers, who would decrease their demand for roast coffee and turn to substitute beverages. But as the supply curve is inelastic, increase/ decrease in input price will not alter the supply of roast coffee beans.