Question

QUESTION 1

Brewed coffee is one of the most popular drinks in the world and a big market in Singapore. In recent years Singaporean consumers have become concerned that coffee farmers often receive very low prices by large coffee companies buying their beans and selling them in international markets. For this reason, fair trade coffee has reached supermarket shelves and coffee shops. Because producing fair trade coffee includes providing extra income for the farmers, this product is more costly to make than other coffee types of comparable quality. Using the demand-supply model, analyse this change in consumer preferences. Examine the likely consequences in one or two markets of your choice.

QUESTION 2

In Brazil, the government is also concerned about the situation explained in question 1. But it has come to light that many coffee brands are wrongly marketed as fair trade by unscrupulous coffee companies, disguising the low wages paid to bean pickers. Such firms also contribute to groundwater pollution and deforestation by squeezing coffee farmers who need to cut production cost to make a living. Use the theories of market failure and government intervention to explain the reasons for this concern. Identify different suitable government interventions that the Brazilian government may consider. Critically discuss potential problems with these interventions.

Answer 1

Answer 1:

The diagram above depicts that intial equilibrium in the market for brewed coffee oocurs at point E1. A change in the tastes and preferences of the consumers towards brewed coffee will lead to increase in the demand for brewed coffee and this will lead to rightward shift of the brewed coffee to D'D'. Since the cost of production of brewed coffee is higher as compared to other types of coffee, the supply curve will shift leftwards to S'S' and thus at new equilibrium point E2, it can be seen that equilibrium price has increased and impact on quantity is ambigious as it depends on the quantum of the shift of AD-AS curves.

In other types of coffee market we will see a fall in the demand for coffee which are substitutes of this coffee and this leads to decrease in equilibrium price and equilibrium quantity of coffee.