Thursday, May 19, 2011

Rising Coffee Prices

Coffee prices have been rising over the last few months, and the reason can be explained by the supply and demand model. Specifically, a change in the supply curve, which is resulting in an increase in coffee prices. How? Over the last few years, temperatures in many South American coffee growing regions have been higher than normal. This results in coffee plants not producing at their optimum (for coffee production) and also has resulted in more diseased plants and higher amounts of fungus on coffee. Hence production of coffee has been reduced, and in microeconomic terms, this results in a shift of the supply curve to the left. If demand for coffee remains the same, and changes in temperature are in essence shifting the supply curve for coffee to the left, then this results in higher coffee prices, which is in fact what we are seeing.

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