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Ms Lee: Hi

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Please write out the names of the members in the group.
1. Henrich
2. Zi Hui
3. Xingyang
4. Serene
5. Umair

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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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Availability of cheaper substitutes such as robusta beans and sugar cane
Increased cost of input - Coffee is a labour-intensive crop and labour prices are increasing

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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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Explain market mechanism:
It is the process that works through the interaction of market forces of demand and supply to determine the equilibrium price and quantity of a certain good offered for sale in the free market

Define demand:
Demand is the amount of a good that consumers are able and willing to purchase in a given period of time at various prices

Define supply:
Supply is the amount of a good that producers are able and willing to offer for sale in a given period of time at various prices

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At the initial equilibrium E1, equilibrium price is P1 and equilibrium quantity is Q1

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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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SUPPLY:
S: From the news article 2, it states "That region has been hit by leaf rust, a fungal disease, which could destroy 30% of the crop this year." This shows that the production of Arabica coffee beans would decrease in the long run.
E: This is because the fungal disease would cause these coffee beans to be unsafe for consumption and thus not being able to be sold to coffee companies for coffee enthusiast to buy. Therefore, even though the Arabica beans have low prices, the supply itself decreases, causing a slight increase in prices of these beans. Hence, the disease would cause a decrease in supply of Arabica coffee beans. The supply curve would shift leftward, ceteris paribus.

SUPPLY:
From article 1, it states thats "Coffee is a labour-intensive crop; picking is still largely done by hand." and "Wages in Brazil and Colombia are rising fast and production costs are above prices."  This shows that there is an increase in the cost of factor input. To produce coffee beans, various inputs such as fertilisers, seeds and labour of the workers are needed. As the coffee beans are harvested by hand, the price of the input of the labour of the workers will rise, hence producing coffee beans is less profitable and therefore lesser coffee beans will be supplied. Thus, there is an increase in the marginal cost of production, hence supply decreases, which is seen in a leftward shift of the supply curve, ceteris paribus.

Demand:
As article 2 states “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.” Most of the beans produced in Brazil are of the arabica variety. Since there are different variety of coffee beans as substitutes therefore when there is a recession which people have lower income that reduces their purchasing power, consumers will thus switch from arabica coffee beans to purchase cheaper coffee beans which is the robusta variety hence causing the demand for robusta coffee bean to rise while the quantity demanded for arabica coffee bean to fall. This causes the price of Brazil coffee bean to fall and also causes a leftward shift in the demand curve for Brazil coffee bean, ceteris paribus.

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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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It is likely that the decrease in demand exceeds the decrease in supply of coffee beans.
Demand for coffee beans is likely to decrease significantly because of the recession which affects the whole of Brazil.The recession causes people to have lower income which leads to a fall in purchasing power so more people will switch to buying cheaper alternatives such as the robusta coffee bean or sugar cane instead of buying the arabica coffee beans which are produced in Brazil thus causing a decrease in demand.

On the other hand, the supply is only likely to decrease by a little "In response to the high prices of 2011 Brazilian farmers invested heavily in new acreage and improved yields with better husbandry and more fertiliser. "(article 1) so even if the crop this year has a decrease in supply by 30% due to leaf rust, the oversupply from previous years is able to cover up for some of the lack of supply this year.

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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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Note: Please draw the diagram manually, take a photo and upload it by clicking the "video icon".

At the original equilibrium E1, price of coffee beans was P1 and quantity Q1.

At the original price level P1, the combined decrease in demand and supply of coffee beans leads to the new quantity supplied(Qs) exceeding the new quantity demanded(Qd).
Thus creating a surplus of QdQs units.
This exerts a downward pressure on prices of coffee beans.
As coffee beans prices decrease

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The new equilibrium is at E2 where the surplus is completely eliminated.The new Equilibrium has a lower price of P2 and a lower quantity of Q2.

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However, the effect on equilibrium price may be indeterminate. Above , we have argued that the equilibrium price decrease because the demand for coffee beans in Brazil decreases more than its supply. However, if the decrease in supply exceeds the decrease in demand instead , the equilibrium price would increase instead.

it is also worth nothing that the effects of the above events on the equilibrium price and quantity would depend on price elasticity values. It is likely that the supply of coffee beans is price inelastic in the short run as agricultural products require a long time to grow and harvest. However, since there are many substitutes available for coffee beans such as sugar cane, the demand is price elastic which will cause consumers to switch to relatively cheaper substitutes which will cause the price of coffee bean in Brazil to decrease.