Question

home / study / business / economics / economics questions and answers / Brazil Nut Price Rises – A Case Study Of Demand And Supply Food Prices Often Rise Or Fall ... Question: Brazil nut price rises – A case study of demand and supply Food prices often rise or fall with go... Brazil nut price rises – A case study of demand and supply Food prices often rise or fall with good or bad harvests or because of a change in demand. A recent example is the price of Brazil nuts, which by May this year had risen over 60% on European markets. Part of the reason for the price rise has been on the demand side. Consumption of Brazil nuts has increased as more people switch to healthier diets. This includes the purchase of the nuts themselves and as part of healthier snack foods. With supply being relatively inelastic, any rise in demand tends to have a relatively large effect on price. A more acute reason is on the supply side. There has been a very poor harvest of Brazil nuts. The nuts are grown largely in the Amazon basin, which has been hit by drought linked to the El Niño effect. This, however, is only a temporary effect and future harvests should increase again as rainfall returns to normal. However, in the longer term, rainfall patterns may change with the effects of global warming. The price rise in the UK has also be aggravated by the depreciation of the pound since the Brexit vote, which has fallen some 13% against the dollar since June 2016. A rise in the dollar price of Brazil nuts has thus led to an even bigger rise in their sterling price.

Questions

1. Explain the specific supply conditions that have affected the price of Brazil nuts in 2017.

2. Why did prices rise ahead of the change in supply?

3. Find out what other food prices have risen or fallen a lot in recent months and explain why.

4. How do real food prices compare today with 10 and 20 years ago? Explain why.

Answer 1

Question:-Explain the specific supply conditions that have affected the price of Brazil nuts in 2017.

The case study above, clearly indicates the concepts of inelastic supply and their effects on the overall prices of goods that are offered for sale.

In the case, the nature of the demand has changed. Nuts were a seasonal product the demand for which was limited. However, changes in tastes and preferences of the consumers switching to a diet which is more healthy has made the demand for the product go up. Also, because of the fact that these nuts are one of a kind and are not mass produced have led to the sudden rise in prices for the same.

Further, due to change in currency rates, the cost of importing has also increased making the price further go up respectively. The El-Nino which is a cyclical storm has also negatively impacted the supply, thus increasing the overall prices of the product.

2. Why did prices rise ahead of the change in supply?

Speculation is one of the key reasons why prices of a product are set to rise. In the coming months because of problems associated with rains, speculations can shoot up prices of the nuts.

Further as explained,exchange rates play an important role in the price levels and since the dollar value of the goods has increased it means that imports are more expensive even without a change in overall supply of the commodity respectively.

Find out what other food prices have risen or fallen a lot in recent months and explain why. How do real food prices compare today with 10 and 20 years ago? Explain why.

Due to issues such as increased global warming, loss of agricultural land to industries and residential complexes, the overall land use has changed rapidly thus increasing the prices of all food items such as pulses, rice, wheat, vegetables etc.

Also, since the overall cost of production has increased due to rising prices of electricity, fuel and also transportation costs, prices have increased to keep a check on the same. Inflation rates have been high and low and have had a role to play in seasonal cycles, however the overall prices of food items has increased many folds over the last 10- 20 years.

The main reasons for such increase are inflation and changing prices of all goods and services respectively.

Please feel free to ask your doubts in the comments section if any.