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Ed Dolan’s Econ Blog Chocolate Lovers Keep a Nervous Eye on Volatile Cocoa Prices Dec. 27, 2014 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.

The Long Rise in Cocoa
Prices  The world price of cocoa, the chief ingredient in chocolate, has been on a long upward trend  Chocolate lovers breathed a sigh of relief as prices took a dip in 2012 and 2013, but in 2014 they rose sharply again.  What is going on? Is chocolate destined to become a luxury good? Dec. 27, 2014 Ed Dolan’s Econ Blog

Strong Income Elasticity  One
factor driving chocolate prices higher has been strong income elasticity of demand  In the US, a 10% increase in income has been estimated to raise per capita chocolate consumption by 9.2%  In Europe income elasticity is about half that, but chocolate is still a normal good—higher income leads to greater consumption What could be more luxurious? Photo by Simon James Kent, http://commons.wikimedia.org/wiki/File:300x300_choc_rose_cake.jpg The elasticity data in this post are based on a study by Henri Jason, “Trends in Cocoa and Chocolate Consumption with Particular Reference to Developments in the Major Markets,” Malaysian International Cocoa Conference, Kuala Lumpur, 20-21 October 1994 (ICCO, ED(MEM) 686). Data from the paper, but not the original paper itself, can be found on line at http://www.cs.trinity.edu/~agros/factors_of_demand.htm Dec. 27, 2014 Ed Dolan’s Econ Blog

Question: How Does Positive Income
Elasticity Affect Price? If chocolate is a normal good, how will an increase in consumer income affect its market price?  Does the demand curve shift? If so, show the new demand curve as D2  Does the supply curve shift? If so, show the new supply curve as S2  Show the new equilibrium price as P2 Dec. 27, 2014 Ed Dolan’s Econ Blog

Answer: How Positive Income Elasticity
Affects Price  If chocolate is a normal good, an increase in consumer income will shift the demand curve to the right. The new demand curve is shown here as D2  Other things being equal, an increase in consumer income will not cause a shift in the supply curve  The market moves long the supply curve until a new equilibrium price is reached at the level P2 Dec. 27, 2014 Ed Dolan’s Econ Blog

Diseases of Plants and Humans
 Cocoa supply, like any farm product, depends on growing conditions  For example, in 2010, a virus causing stunted shoot disease threatened the crop in the Ivory Coast, the world’s biggest producer  The cocoa trees survived the virus, but in 2014, Ivory coast was threatened again, this time by the ebola epidemic in neighboring Liberia and Guinea that cut off an important supply of migrant labor and cast a pall of fear over the market Healthy Cocoa Pods Photo source: http://commons.wikimedia.org/wiki/File:Cocoa_Pods.JPG Dec. 27, 2014 Ed Dolan’s Econ Blog

Question: How Do Natural Disasters
Affect Price? Suppose a natural disaster like plant or human disease disrupts the cocoa crop. How will the market price be affected?  Does the demand curve shift? If so, show the new demand curve as D2  Does the supply curve shift? If so, show the new supply curve as S2  Show the new equilibrium price as P2 Dec. 27, 2014 Ed Dolan’s Econ Blog

Answer: How Natural Disasters Affect
Price  A natural disaster like a plant or human epidemic will cause the supply curve to shift to the left, for example, from S1 to S2 as shown here.  Other things being equal, the epidemic will not affect the demand curve  The market moves long the demand curve until a new equilibrium price is reached at the level P2 Dec. 27, 2014 Ed Dolan’s Econ Blog

Inelastic Demand and Short-Run Price
Volatility  Another factor contributing to the volatility of chocolate prices is very inelastic demand  Short-run price elasticity of demand in the US is estimated at -0.2, and even less than that in big consumer countries like France and Germany  When demand is inelastic, even a small shift in the supply curve causes a large change in the market price Is there any limit to what you would pay for these beauties? Photo by Frank Wouters http://commons.wikimedia.org/wiki/File:Belgian_chocolates.jpg Dec. 27, 2014 Ed Dolan’s Econ Blog

The Bottom Line  The
bottom line? You may soon have to pay more for your chocolate—or you may not  The complexities of supply and demand are likely to keep chocolate prices volatile  But look at the bright side—if the thought of high chocolate prices depresses you, just remember that chocolate itself is a reliable cure for depression! Dec. 27, 2014 Ed Dolan’s Econ Blog

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