Market Equilibrium
Writing Skills - AS Level Example 1
Case Study: Coffee beans prices have gone down from 7500/tonne to $5000/tonne recently. Though prices were high a few years back stating the increase in demand and fall in supply. Even there was a time when there was a shortage of 100000 tonnes of coffee beans in the market. However, recently coffee production has gone up from 1.5 million tonnes to 2 million tonnes among the coffee-making countries due to a good harvest. This has led the stocks of coffee beans to increase up to 30%. On the other hand prices of substitutes for Coffee beans such as Coco and Tea have gone up for 5 days.
Market Equilibrium
Considering the hypothetical data above discuss why did the price of Coffee beans fall to $5000 recently (use your economics knowledge).
Well! the possible discussion could be as stated below;
As the data provided above mentions the fall in prices of Coffee beans from $7000 to $5000/tonne, there may have two possibilities for this to happen; either there was a fall in demand or an increase in supply. Let us find and discuss the possibilities that might have caused the price to fall from $7000 to $5000 below.
Well! it is mentioned in the latter part of the case study that there was a good harvest leading to an increase in Coffee beans production from 1.5 million tonnes to 2 million tonnes and a hike in stocks of Coffee beans by 30% and the earlier part of the case study stated that there was a time when there was a shortage of 100000 tonnes of Coffee beans in the market.
Market Equilibrium
This can lead us to analyze the issue in the right direction. As there was a shortage of 100000 tonnes of Coffee beans in the market so there can not have fall in demand. Why? This is due to the occurrence of shortage; a shortage occurs when there is a higher quantity of of a good demanded but a lower quantity of that good is supplied in the market. So we can reject the first possibility of a fall in demand leading to a fall in prices.
Let us look through the other possibility which is an increase in supply. It is more likely that the prices of Coffee beans have fallen due to an increase in the supply of Coffee beans. Let us discuss it using an equilibrium model below.
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| Figure 1 |
Market Equilibrium
In Figure 1, we can see that as the supply curve shifts to the right from Supply 1 to Supply 2, there is a new equilibrium leading to a fall in price from P1 to P2 and an increase in quantity from Q1 to Q2. Surely, this has happened in the Coffee beans market.
Using the graph, let us consider that the market was at the equilibrium where the supply curve Supply 1 intersects with the demand curve Demand at price P1 and quantity Q1. P1 states the old price of $7000/tonne and Q1 states the old quantity of 1.5 million tonnes of Coffee beans.
As there was a good harvest among the Coffee beans-producing countries recently so the increase in Coffee beans production has led to an increase in the supply of Coffee beans in the market. The increase in supply is reflected as a shift in the supply curve from Supply 1 to Supply 2 in Figure 1. The shift in the supply curve has brought down the price from $7000/tonne to $5000/tonne at P2 and increased the output from 1.5 million tonnes to 2 million tonnes in Q2.
Why did the price go down? As there was an increase in production leading to an increase in supply which must have caused an excess supply at the same price of $7000/tonne. An excess supply always causes downward pressure on the price as sellers start competing with each other just to get rid of their additional stocks. This reflects the rational behaviour of the sellers as they would like to avoid incurring any losses if in case they are unable to sell their stocks at the initial price level.
To conclude, it is the increase in the supply has caused the prices of Coffee beans to go down led by a good harvest among the Coffee beans producing countries.
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