b)
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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. Being the largest coffee producers along with Colombia and Indonesia, when Brazil was reported to have had coffee bushes harmed by frost, this triggered the price to rise. A decrease in supply from S to S1 will decrease quantity output from Q to Q1, which will therefore set a new equilibrium price. In this situation, the supply of coffee falls, therefore for the equilibrium price is higher.
ii)
c) From studying the data, a decrease in supply would mean that the quantity output would also decrease, therefore increasing the price because a new price equilibrium is reached (as shown in part Bi).
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. People don’t consider tea as a substitute good for coffee therefore they will be willing to pay a high price for coffee as it has no substitute good.
When Brazils coffee bushes were affected, then stores and supermarkets that get coffee supplies from Brazil can turn to places such as Colombia and Indonesia to supply them the coffee. This would mean a large increase in demand for coffee from these two countries as most of the world’s coffee is supplied by Brazil.
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.
