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Posts Tagged ‘inferior good’

Chocolate prices set to soar

Your favourite chocolate bar or your drink of hot chocolate could soon be much dearer. Since March, the price of cocoa has risen by 34% and much of this increase remains to be passed on to the consumer. The price of cocoa butter is up 70% since the beginning of the year.

On the demand side, sales of luxury cocoa-rich chocolate and hot chocolate have been rising and chocolate manufacturers, with relatively low forward purchases of cocoa, are likely to have to buy more in spot markets. What is more, there is growing speculative demand as traders anticipate higher prices to come.

On the supply side, dry weather in West Africa, where 70% of cocoa beans are produced, has led to a fall in output. Estimates suggest that cocoa production in the 12 months to end-September 2013 will be 2.7% down on the previous 12 months. Supply is expected to be 60,000 tonnes less than demand, resulting in a fall in stocks from 1,833,000 to 1,773,000.

The following articles look at the ‘crisis’ for chocoholics and at the market conditions that lie behind it.

Articles
Craving for a chocolate fix? Prepare to pay more Reuters, Lewa Pardomuan and Marcy Nicholson (15/9/13)
Hot chocolate demand sends cocoa prices soaring Financial Times, Emiko Terazono (15/10/13)
Price of chocolate ‘to triple’ The Telegraph (8/10/13)
Paying more for chocolate? You will be CNN Money, Alanna Petroff (14/10/13)
Chocolate Prices Soar in Dark Turn The Wall Street Journal, Leslie Josephs and Neena Rai (22/9/13)
Chocolate prices could increase as cocoa costs soar BBC News, Nigel Cassidy (21/10/13)
… and on a lighter note: Rising Prices Signal A ‘Devastating’ Global Chocolate Crisis: Should Government Act To Save Us? Forbes, Doug Bandow (14/10/13)

Data
Cocoa beans: monthly price Index Mundi
ICCO daily prices of cocoa beans International Cocoa Organization (click on calendar to select month)
Production of cocoa beans International Cocoa Organization (click on Statistical Data links in right hand panel
Monthly review of the market International Cocoa Organization

Questions

  1. What happened to cocoa prices from January 2009 to March 2013? Explain this movement in prices.
  2. Why have cocoa prices risen so much since March 2013? Illustrate your analysis with a supply and demand diagram.
  3. If the demand for luxury chocolate fluctuates considerably with the state of the business cycle, what does this suggest about the income elasticity of demand for luxury chocolate?
  4. How would you establish whether or not cheap chocolate is an inferior good?
  5. If cocoa prices rise by 34%, what determines the percentage by which a bar of chocolate will rise?
  6. What determines the difference between cocoa futures and spot prices?
  7. How realistically could government intervention improve the lot of chocoholics?
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Recession – bring it on!

Whilst a recession has a devastating impact on many industries – not least construction and related sectors – there are some firms who will fare much better during a recession. Firms who have products whose demand is income inelastic, or which are even inferior, will feel the impact of the recession much less than those whose goods have a more income elastic demand. The two articles below consider jobs and businesses that are less likely to suffer in recessionary times.

Slump busters: jobs that beat the downturn BBC News Online (27/11/08)
Riding the recession: how some businesses are doing well in the downturn Times Online (23/11/08)

Questions

  1. Define the terms (i) “normal good” and (ii) “inferior good”.
  2. What will be the value of the income elasticity of demand for (i) a normal good and (ii) an inferior good?
  3. Discuss strategies that firms can adopt to minimise the impact of an economic downturn on (a) their total revenue and (b) their profitability.
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Let them eat offal

According to the article linked to below, the demand for offal has risen by 15% in France since the investment bank Lehman Brothers went out of business. Over the same time period French butchers have faced a 2.6% fall in the demand for beef. So is the global financial crisis set to make offal merchants rich?

Recipes for the recession bring offal back into fashion in France Times Online (20/11/08)
Let them eat offal Guardian (20/11/08)

Questions

  1. Given the recession in France, as what types of good would you classify (a) offal and (b) beef?
  2. What values would you expect for the income elasticity of demand for (a) offal and (b) beef?
  3. What are the principal determinants of the demand for offal?
  4. Using diagrams as appropriate, explain the changes that have taken place in the market for offal in recent months.
  5. Discuss the extent to which the increase in demand for offal has been caused by the promotional strategies adopted by The National Federation of French Offal Merchants.
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