Question

On the front page of the L.A Times, there was an article talking about the plight of the coffee growers. It stated that the record coffee harvest has devastated the income (revenue) of the coffee growers. Explain why this has happened. Now add in the cost and see if you can infer the implication on the profit of the coffee growers.

Answer 1

A record harvest has led to an increase in supply of coffee, shifting the market supply curve rightward, resulting in higher equilibrium quantity but lower equilibrium price. Since demand for coffee is relatively inelastic, the fall in price has resulted in a less-than-proportionate rise in quantity demanded, therefore total revenue has decreased.

When cost structure is unchanged, lower total revenue means a fall in profit ceteris paribus, since profit is obtained by deducting total cost from total revenue.