Economic Essay

Study question:

1. Why does the price of coffee fluctuate so widely?

Answer: Nowadays, coffee is a necessity for everyone. So many people say that coffee is a profitable industry, it is second largest world production, they don’t realized the coffee farmers are suffer from the coffee crisis. In 1980 to 2003, the price of coffee fluctuates so widely, from US$1.20 per pound dropped to US$0.50 per pound(1). The primarily result is the entry of Vietnam into coffee business and production increases in Brazil. This two country cause the coffee oversupply(2), when the quantity supplied increase in any given price, this cause quantity supplied exceed quantity demanded. By 2001-2002, the coffee production was 113 million bags, it exceed the world consumption which is 106 million(3). The reason of Vietnam produce more coffee is a policy decision, they trying to run out of poverty. And Brazil increases its production because of improvements in production method such as harvesting, irrigation and advance in supply chain(4). Because coffee doesn’t have close substitutes, the price elasticity of demand is inelastic. When price of coffee decrease 10%, the demand for coffee only increase less than 10%, cause total revenue decrease. Another factor is giant coffee processors control market manipulation, like Kraft and Nestle, it has market power(5). They control the price of coffee, it purchases coffee material with low price, after process, it sells the coffee with high price, therefore the world price of coffee are always low but market price of coffee are always high. The processors can get high profit in this situation. There is another event to cause coffee price fluctuate. When there is frost, pests or disease in coffee producing regions(6), this will damage their crops, cause reduction in supply. In this situation, the price of coffee will increase substantially, but it will not maintain the price at higher level, because high price will encourage farmers produce more...