Question

Consider the the market for South American grown coffee beans and imagine that poor weather and a virulent strain of coffee fungus wipe out many coffee crops in Africa. Explain why we are likely to observe the following: a temporary shortage of South American grown beans, followed by rising prices and increasing sales of beans until there is no longer any shortage.

Answer 1

Ans - : The impact as follows -:

• WHY SHORTAGE ? -: Due to bad weather and coffee fungus , the crops have been destroyed. This decreases the overall production of coffee beans . Therefore , it will decrease the supply as a result . Shortage would be caused due to less supply in relation to demand or excess demand over supply.
• WHY PRICE RISE? -: The prices will rise due to shortage . There will be excess demand and less supply to satisfy it . The consumers will therefore pay more to get the coffee beans which are in shortage i.e. excess demand over supply will pull up the prices .
• WHY INCREASING SALES? -: Now the prices have risen . The price rise has positive effect on supply i.e. it increases the supply . High prices give more incentives to the suppliers to supply more . Many other producers will be attracted to offer coffee beans at high prices and will sell more to increase their revenue. Therefore, there will be increase in sales until and unless the shortage is fully satisfied. The sales increase till the excess demand is not satisfied. The moment shortage is addressed , the market will be at equilibrium leading to zero shortage i.e. demand = supply.