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Economics - Coffee Price Rise Questions.

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Introduction

ECONOMICS Coffee Price Rise Questions a) Between 1993-1994, there was an increase in the price of coffee beans, due to reports that frost had harmed up to one third of Brazil's coffee bushes. From March '93 to August '93, there was a 25% increase in the price of coffee from $800-$1000 per tonne. There was then a further 20% increase in price from August '93 to February '94 from $1000 per tonne to $1200. From February '94 to June '94, there was a huge increase in price from $1200 to over $3000 per tonne, which is a 162.5 % increase. The general trend of the graph is that the price rises. b) i) As we can clearly see from the data, Brazil were the biggest producers of coffee between 1992-1993 with 25.7 millions of 60 kilo bags. ...read more.

Middle

According to economic theory, if the supply of coffee falls from S to S1 due to bad conditions, quantity output falls from Q to Q1, therefore prices will rise from P to P1. This is shown in the diagram above. Therefore if prices increase, in theory demand will decreases. Coffee is a necessity because everyone drinks it, especially in the west where the frost affected Brazil's coffee bushes. There is no substitute good for coffee, therefore the initial demand is already going to be high. Evaluating the situation realistically, if the price increases then the demand will remain the same and if not, then demand will be higher as supplies of coffee are low and there are no substitute goods. ...read more.

Conclusion

To conclude, the supply of coffee decreased due to frost, which affected a third of Brazils coffee bushes. What was expected to happen in theory didn't happen. The expectation was for prices to rise due to low supplies, which would mean demand would decrease, as prices are too high. An alternative for the consumers of coffee is to buy a substitute good. The real outcome was that supply decreased but demand did not change, as coffee is a good, which has no substitute. In this situation and any situation, we can say that the theory can be correct and incorrect depending upon the good and if it has a substitute or not. If supplies are low then prices will increase but demand will only change if there is a substitute good, and the demand for the substitute good will increase. If there is no substitute good then demand will not change much. Dipesh Mistry 12MMB ...read more.

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