CHAPTER 1, 2, 3

Indeed to start answering the three fundamental question of economic organization are:

What?
We are going to manufacture chocolate bars.

How?
First, we need to purchase the raw materials, cocoa being the principal raw material,
afterwards mixing and cleaning the cocoa, subsequently roasting and grounding the seed,
then blending and mixing, refining, conching, molding and finally wrapped.

For whom?
The idea to manufacture the chocolate bars is mostly to the kids and teenagers that
generally would prefer something sweet. This is in the rank from 5 to 20 years.

The factors of production are:

Land: The chocolate production starts with harvesting coca in a forest. Cocoa comes from
tropical evergreen Cocoa trees, such as Theobroma Cocoa, which grow in the wet lowland
tropics of Central and South America, West Africa and Southeast Asia. Cocoa needs to be
harvested manually in the forest. The seed pods of coca will first be collected; the beans
will be selected and placed in piles. These cocoa beans will then be ready to be shipped to
the manufacturer for mass production.
Labor: Small farmers (who are entrepreneurs in their own right) have developed the skill of
producing a high yielding, top grade product. Cocoa production is often their only source of
income.
Capital: As it is produced 1,200 bars per minute, we add to the capital, machines, the
equipment (toaster oven, crushing equipment, roll refiner, molds, etc.), buildings, and
vehicles to produce the finish good, the chocolate bars.

We may think that manufacturing chocolate bars, in the chocolate factory, can have an
externality, and in fact, it does. We know that externalities can either be helpful or harmful.
We also know that air pollution is a negative externality, but in the case of a chocolate
factory it is considered a positive externality for the people who can experience it. Because
of the aroma that comes with it. As if we were living near a bakery we will smell the
delicious aroma, wont we?
With the demand schedule (the graphic below) we can apply the law of downward-sloping
demand, which in our case, if we increase the price of the product, less customers will buy
it.

Qd

20

10

18

13

15

20

10

35

25
20
Price

Price

Downward-Sloping Demand
Curve

15

10

Downward-Sloping
Demand Curve

5
0
0

10

20
Quantity

30

40

In addition, as the price of one good falls, it becomes relatively less expensive. Therefore,
assuming other alternative products stay at the same price, at lower prices the good appears
cheaper, and consumers will switch from the expensive alternative to the relatively cheaper
one. If we are talking about a substitution effect, in the case of the customer, if he/she was
buying Ferrero Rochers chocolate but suddenly the price was too high, then he/she will
start buying the chocolate that it is not that expensive, and if we have a cheaper price of the
product and the customer likes it, he/she can buy it. And in the income effect the customer
will only find himself or herself buying something according to their needs or what they
can afford, and if the company is selling at higher prices, then the customer will not find it
necessary to buy it.

At this point, what can affect the demand curve and make a switch on it?
Factors affecting the
demand curve
Average income
Population

Example for chocolate bars

Prices of related goods

Tastes
Special Influences

If income rises, people will purchase chocolate in more quantity.

If there is a population growth that means that more little kids will find the need
to purchase more chocolate.
Lower cocoa prices help to raise the demand for chocolate.
Eating a new kind and healthy chocolate bar makes people healthier.
A special influence of chocolate include if is to increase health in the country.

Affecting for bad or better, those factors may make the curve switch, if its positive
rightward and if its negative leftward. If income rise, our demand curve will shift to the
right. As it is shown on the graphic below.

Increase in Demand
25

Qd'

20

A 20

10

15

15

B 18

13

20

C 15
D 10

20
35

Price

Qd

Price

10

29
45

D'

Shift In Demand
D'

5
0
0

10

20
30
Quantity

40

50

Thus, of course we need to know how much are we willing to produce in order to sell, and
at which price; always holding other things constant, we need to create our supply schedule
that we are going to need, as it is shown in the graphic below.

Qs

A 20

33

B 18

28

C 15

20

D 10

25

20
Price

Price

Supply Curve Relates Quantity

Supplied

15
10

Supply Curve Relates

Quantity Supplied

5
0
0

10

20
Quantity

30

40

And there are some factors that also affect this supply curve, for example:
Factors affecting the
supply curve
Technology
Input prices
Prices of related

oods
Government policy
Special Influences

Example for chocolate bars

The utilization of modern equipment can accelerate the chocolate production.
Having less fixed costs, lowers production costs hence, supply increases.
Either if we run two different colors of chocolate, if the prices of one falls, the supply
for the other one rises.
Taking off taxation over importing cocoa increases supply.
If it is used an external use of information so the consumers can compare prices.

So as the production can be accelerated, the supply will increase and therefore, shifts to the
right, as we may see on the graphic below.

Increase in Supply
Qs

Qs'

20

33

40

18

28

35

15

20

27

10

15

25

20
Price

Price

S'

15
Shift in Supply

10

S'
5
0
0

20

40
Quantity

60

Therefore we can conclude with our equilibrium of supply and demand curve having equals
the quantity demanded and the quantity supplied. In our case the equilibirum point is point
C, as it is shown on the graphic below.

Price

Quantity demanded

Quantity supplied

20
18

10
13

10

35

Sate of market
33
Surplus
28
Surplus
5

Shortage

Market Equilibrium
25

Price

20

Surplus
C

15
10

Equilibrium Point

Demand

Shortage

Supply

0
0

10

20
Quantity

30

40

Pressure on Price
Downward
Downward
Upward