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Changes in the demand and supply of coffee explain of coffee falls to $0.

50 per pound and the quantity

why world wholesale coffee prices fell by nearly rises to 15 billion pounds per year (shown by new
half from 1998 to 2004, reaching their lowest level equilibrium point E" in the figure). This, however,
in three decades. The sharp decline in coffee prices produces a total revenue (income) for coffee farmers
threw millions of small coffee farmers and their of only $7.5 billion per year. If only D shifted to D',
families in developing countries into extreme pov- the price of coffee would be $1.50 (point E' in the
erty, while multinational food companies (such as figure), while if only S shifted to S', the price of cofNestlt) and coffee shops (such as Starbucks) posted fee would be $0.25 (point E*).
From 2000 to 2002, the supply of coffee
very high profits from coffee sales.
The problem in the coffee market arose from the increased at twice the rate of the increase in demand
fact that the supply of coffee increased faster than as a result of new countries (such as Vietnam) startits demand, causing coffee prices to fall. Since cof- ing to produce and export coffee on a large scale
fee prices fell faster than quantities increased, the and others (such as Indonesia and Brazil) sharply
earnings of coffee farmers also declined. This can increasing exports. This caused the price of coffee
be shown with Figure 2-8, where D represents the that growers received to fall from $1.40 per pound
world's demand curve for coffee and S represents the in 1998 to as low as $0.48 in June 2002, which was
world's supply curve. Curves D and S intersect at the lower than the production costs of many poor small
equilibrium world price of coffee of $1 per pound farmers. But then bad weather in producing nations
and the equilibrium quantity of 10 billion pounds per and higher demand in consuming nations came
year (point E in the figure), giving coffee farmers a to the rescue, resulting in coffee prices rising to
total revenue (income) of $10 billion per year. If, over $1.58 in February 2008 (it was $1.25 in December
time, D shifts to D' and S shifts to S', the world price 2010).

Million pounds of coffee per year

FIGURE 2-8 Demand, Supply, and Coffee Prices Curves D and S refer, respectively,
to the world's demand and supply curves for coffee. Curves D and S intersect at point E,
giving the equilibrium price of coffee of $1.00 p e r pound and the equilibrium quantity of
10 billion pounds per year. If D and S shifted, respectively, t o D' t o Sf, t h e new equilibrium
point would b e E". giving the price of $0.50 per pound and the quantity of 15 million
pounds per year.


Source: "Drou-ningin Cheap Coffee," The Econornisr (September 29, 2001). pp. 43-34; "Crisis Call to Coffee Growers." Finutlcia/
Times (April 16. 2002). p. 23; "Price of Coffec Jumps to 10-Year High." Finuncial Times (October 15,2007), p. 18; "Coffee Prices
Stirred by Shortage". Financial Tinles (May 11.2009), p. 13: and
(December 2010).