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Ms Lee: Hi

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Please write out the names of the members in the group.
1. Jamie (L)
2. Zoe
3. Larissa
4. Jaaziah
5. Javan

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Dear Students,

Welcome to Home-Based Learning 2016!

By now, you should have the list of the team members in your group. Each team will analyse 2 articles below to identify 3 evidence/information (2 Demand + 1 Supply or 2 Supply + 1 Demand factors)  to answer the following essay question:

a) With reference to the 2 news articles, explain the fall in prices of coffee beans in Brazil.

To discuss the answers with your group members, double click anywhere on the wall and a virtual "sticky note" will appear at the top. From, enter your name, then you can use the "sticky note" to "chat" with each other.

For example, Miss Lee: I don't think that is a non-price factor that affects demand. Please remember to write your name before the statement :)

Lastly, please identify these non-price determinants of demand & supply by quoting the relevant phrases from the article.

For example, as stated in article 1, "the recession in Europe has hit demand". After quoting the evidence for the article please proceed to explain how this non-price factor affects demand or supply with economic rigour.

I have provided some scaffolding statements to guide you in your essay development. Address each statement by writing the essay segment in the respective sticky note. Press the pencil button to write the respective essay segment.

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Topic: Demand, Supply & Market Equilibrium

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Topic: Demand, Supply & Market Equilibrium

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Objective - Students will be able to identify and explain how the demand and supply factors affect the market for coffee beans.

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With reference to the 2 news articles,  explain the fall in prices of coffee beans in Brazil.

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With reference to the 2 news articles,  explain the fall in prices of coffee beans in Brazil.

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NOT everyone appreciates the pungent smell of roasting coffee. Just ask the authorities in Brazil, who have been faced with farmers burning bags of beans and chanting slogans borrowed from recent nationwide protests to demand fatter state subsidies. The farmers are upset by falling prices: their beans now fetch around $106 a 60kg bag, a four-year low and less than half what they could get a couple of years ago. A reversal looks unlikely soon.

A third of the world's coffee is grown in Brazil. Along with other countries that mainly cultivate the tastier and pricier arabica-bean variety, it faces two problems. First, the traditional markets for their wares are saturated. Growth in Europe, America and Japan, which between them glug over half the world's coffee, is flat. Second, in places like China, Indonesia and Brazil itself, where coffee is an affordable luxury for the middle class, the market is growing by around 5% a year. But these drinkers are filling their pots with cheaper robusta beans-what Kona Haque of Macquarie dubs the "emerging-market coffee".
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Strong demand for entry-level coffee-40% of the world's coffee crop is now robusta beans-has enabled Vietnam to go from almost nothing a decade ago to producing 25m bags today (see chart). Worse still for arabica producers, the recession in Europe has hit demand and squeezed profits for roasters. These processors, including big food firms such as Nestlé and Kraft, have responded by blending cheaper robusta with arabica. As a result robusta prices have not fallen as fast as arabica. Even so, the narrowing gap between them has not yet prompted beancounters to reintroduce the costlier variety.

Nor is the supply of arabica beans likely to fall. In response to the high prices of 2011 Brazilian farmers invested heavily in new acreage and improved yields with better husbandry and more fertiliser. High prices also convinced Colombian farmers to replant many coffee plantations with more productive bushes. What's more, the bumper harvest of 2012, an "on" year for Brazilian coffee bushes, should be followed by an "off" year as the bushes' yields naturally fall after their exertions. Yet good weather means that even this year's "off" crop is a bumper one, with the prospect of another "on" year to come.

Low arabica prices are accompanied by rising costs. Coffee is a labour-intensive crop; picking is still largely done by hand. Wages in Brazil and Colombia are rising fast and production costs are above prices. Planting other sorts of crops, the usual response to agricultural boom and bust, is not an option. Prices for sugar cane, a potential alternative, are low. Coffee is mainly grown on small plots by farmers who have known nothing else.

Consumers ought to benefit from low prices, but discerning drinkers will still be disappointed. Demand for the fanciest arabica beans is healthy, as the global proliferation of coffee chains shows. Much of the finest coffee is grown in Central America in places such as Guatemala, Nicaragua and El Salvador. That region has been hit by leaf rust, a fungal disease, which could destroy 30% of the crop this year. Cutting back plants to deal with it is set to hit production next year, too. For the tastiest coffee, there is no chance of a cheap shot.

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NOT everyone appreciates the pungent smell of roasting coffee. Just ask the authorities in Brazil, who have been faced with farmers burning bags of beans and chanting slogans borrowed from recent nationwide protests to demand fatter state subsidies.

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COFFEE has many devoted drinkers. Its appealling aroma and caffeinated kick mean that 83% of all American adults drink it, 63% of them on a daily basis, according to a survey from the National Coffee Association. Yet despite the strong demand for coffee, some suppliers are unhappy. In Brazil, which produces a third of the world's coffee beans, farmers are striking over falling prices and burning sacks of coffee in protest. Why are coffee-growers feeling the strain?

There are two main varieties of coffee bean: arabica and robusta. The former, which accounts for around 60% of the world's crop, is considered superior and fetches higher prices; the latter is a hardier crop, resistant to leaf rust, but has a more bitter taste. Most of the beans produced in Brazil are of the arabica variety. But these beans now fetch around $106 a 60kg bag, less than half of what farmers could get for them a couple of years ago. Farmers in Colombia and Ethiopia, who also produce arabica beans, are suffering too. The reason is that production of coffee, and of cheaper robusta beans in particular, is booming. Vietnam has gone from growing almost nothing a decade ago to producing 25m bags of robusta beans a year today. The result is an oversupply of coffee.
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This hurts producers of arabica in particular, for several reasons. First, consumption in the developed world-American, European and Japanese drinkers consume more than half the world's coffee-is flat, and the recession has squeezed the profits of big food companies such as Nestlé and Kraft. They have taken to blending cheaper robusta beans into their products to maintain their margins, causing the price of robusta to fall more slowly than that of arabica. In the developing countries such as China, Indonesia and Brazil, meanwhile, where the emerging middle classes are discovering the joys of coffee and the market is growing by around 5% a year, robusta is the bean of choice. To make matters worse for arabica growers, falling prices have been accompanied by rising costs: coffee is still largely picked by hand, and wages are rising fast in Brazil and Colombia. Many Brazilian and Colombian farmers invested to boost production of arabica in response to the high prices of 2011, which has added to the oversupply and further depressed prices. And good weather in Brazil means that this year's crop has turned out to be unexpectedly large. That is why Brazil's farmers are striking, and are demanding more protection, in the form of fatter subsidies, from the state.

Farmers who grow arabica beans tend to be specialists, and do not plant other sorts of crops (which is the usual way for farmers to insulate themselves from volatile prices for a particular crop). Prices for sugar cane, a potential alternative, are also low. Aficionados' demand for the fanciest coffees, which fetch higher prices, is healthy, but for farmers to move upmarket takes time and expertise. Indeed, discerning coffee drinkers are also feeling the pinch, because the Central American countries where the finest coffee is grown, including Guatemala, Nicaragua and El Salvador, have been hit by leaf rust, which could wipe out 30% of this year's crop. So even while arabica beans fetch low prices on commodity markets, the price of the fanciest beans is going up. A storm in a teacup it ain't.

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COFFEE has many devoted drinkers. Its appealling aroma and caffeinated kick mean that 83% of all American adults drink it, 63% of them on a daily basis, according to a survey from the National Coffee Association. Yet despite the strong demand for coffee, some suppliers are unhappy.

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Introduction:

Define demand :The demand for coffee refers to the number of coffee that consumers are both willing and able to purchase at various prices in a given period of time.

Define supply: the amount  of coffee beans that producers are both willing and able to produce at various prices in a given period of time. Throughout the essay, we assume cetreis peribus, which is holing all other factors constant when studying the effect of each factor.

Direction : the first part of the essay aims to explain supply factors such as good weather and climate which resulted in an increase of supply of coffee beans, and demand factors  such as the fall in the level of income and the availability of substitutes.

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Body: Identify and explain whether the factor/event shifts the demand or supply curve. (2 Demand + 1 Supply or 2 Supply + 1 Demand)

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Body: Identify and explain whether the factor/event shifts the demand or supply curve. (2 Demand + 1 Supply or 2 Supply + 1 Demand)

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Larissa:

Supply factor
State: "good weather in Brazil means that this year's crop has turned out to be unexpectedly large". This shows that there is an increase in the supply of coffee.
Explain: suitable weather allows for the optimum growth of coffee beans, ceteris paribus.
Hence, the supply of coffee beans increases, shifting the supply curve rightwards from S1 to S2.

Demand factor 1
State: "recession in Europe has hit demand and squeezed profits for roasters" and "consumption in the developed world is flat, and the recession has squeezed the profits of big food companies such as Nestlé and Kraft". The recession has caused a decrease in demand for coffee beans.
Explain: The recession causes a fall in income and lowers the purchasing power of households and hence decreases the quantity demand for coffee beans , ceteris paribus. Coffee beans are assumed to be normal goods.
Hence, the demand for coffee beans decreases, shifting the demand curve leftwards.

Demand Factor 2
State: "They have taken to blending cheaper robusta beans into their products to maintain their margins, causing the price of robusta to fall more slowly than that of Arabica" and "But these drinkers are filling their pots with cheaper robusta beans". This shows that people choose robusta beans over the more expensive arabica beans, causing the demand for arabica beans to decrease, shifting the demand curve leftward

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Body: Decide the direction and magnitude in which the curves shift

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Body: Decide the direction and magnitude in which the curves shift

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Larissa: The demand curve will shift more than the supply curve. The 2 factors affecting the demand curve affects it more implicitly than the factors for supply. this is because the supply for coffee beans is limited due to limited land that suppliers are able to grow their crops on. Hence, the factors affecting supply would cause a smaller shift as compared to factors affecting demand.

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Javan: Initially, D1 and S1 intercept each other at the point E1. The initial market clearing price at E1 is P1and the equilibrium quantity is Q1

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Body: Using the market adjustment process, explain how the shift(s) changes the
equilibrium price and quantity (Explanation of diagram):

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Body: Using the market adjustment process, explain how the shift(s) changes the
equilibrium price and quantity (Explanation of diagram):

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Javan: The demand curve shifts leftwards from D1 to D2 and the supply curve shifts rightward from S1 to S2.The degree of the leftward shift in the demand curve is more than that of the rightward shift of the supply curve as explained earlier. The new quantity demanded at P1 is Qd and the new quantity supplied at P1 is Qs,as shown in the graph below. As a result this causes a surplus of QsQd. Suppliers will then reduce the price of the coffee bean so as to attract more buyers so as to get rid of the surplus. This will then exert a downward pressure on the price on the coffee bean. As the price of the coffee bean decreases, quantity demand will increase due to the substitution and income effect, which states that buyers will switch away from the more expensive option to a cheaper substitute and that , when price of the good decrease buyers will be able to buy more quantity of the good with the same level of income. However, as price decreases quantity supplied will decrease as profit-driven suppliers will be earning less profit. Hence surplus is gradually reduced as price of the coffee bean decreases. The price will stop decreasing once it has reached the new equilibrium at E2, as shown in the graph below

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Javan: At the new equilibrium E2, the new market clearing price P2, is lower than the initial market clearing price P1. Equilibrium quantity at E2, is lesser than the equilibrium quantity at E1, as shown in the graph above.

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Jamie: A decrease in the demand and an increase in the supply reinforces the fall in the equilibrium price of the beans in brazil and when the extent of the fall in demand is greater than the extent of increase in supply, the equilibrium quantity decreases. The equilibrium price is affected by price elasticity values. The elasticity of price of the beans in brazil, which is mostly arabica beans, is price elastic due to the substitute of robusta beans and sugarcane. As people choose robusta beans over arabica beans, Hence, percentage quantity demanded for coffee beans decreases less than proportionate as compared to the percentage decrease in price. Thus total revenue of farmers growing coffee beans will decrease.