Question

Chocolate Prices Rise Due To Asia's Increased Appetite Chocolate prices could soar due to an increased demand for chocolate in Asia-the consumption in China alone has doubled in the last decade. Another reason for higher prices is smaller harvests in key cocoa-growing nations. Source: BBC News, December 19,2013 a. Explain how rising chocolate prices influence the market for labor employed in the chocolate industry. b. Draw a graph to illustrate the effects of rising chocolate prices on the market for labor employed in the chocolate industry.

Short answer

Higher chocolate prices increase labor demand in the chocolate industry, leading to higher wages and more employment.

Step-by-step solution

Understand the Basics of Supply and Demand

Review how the principles of supply and demand affect the market. When the price of a product rises, producers are typically motivated to produce more, and this, in turn, affects the labor market as the demand for workers in the industry may increase.

Analyze the Effect on Labor Demand

As chocolate prices rise due to increased demand and smaller harvests, chocolate producers will seek to increase production to capitalize on higher prices. This will likely lead to an increased demand for labor in the chocolate industry, shifting the labor demand curve to the right.

Graph the Market for Labor

Draw a graph where the X-axis represents the quantity of labor, and the Y-axis represents the wage rate. Initially, label the demand curve for labor as D1 and the supply curve for labor as S. As demand for labor increases, the new demand curve shifts right to D2.

Show the New Equilibrium

Label the initial equilibrium point where D1 intersects the supply curve S as E1. After the demand curve shifts to D2, the new intersection point with supply curve S should be labeled as E2. The new equilibrium wage rate will be higher, and the quantity of labor employed will also increase.

Key concepts

Supply and Demand

To understand the impact of rising chocolate prices on the labor market, it's essential to first grasp the basic principles of supply and demand. The law of demand states that consumers will purchase more of a product when the price decreases and less when the price increases. Conversely, the law of supply indicates that producers are willing to offer more of a product for sale as its price rises because higher prices can translate to higher revenues.
The rising demand for chocolate in Asia, particularly in China, directly affects the chocolate market. This increased demand means that more people want to buy chocolate, pushing chocolate producers to ramp up production. On the supply side, smaller harvests in cocoa-growing nations reduce the available supply of cocoa beans, contributing to higher prices.
When the price of chocolate rises, producers are incentivized to produce more to take advantage of the lucrative market. However, producing more chocolate requires additional resources, including labor, which leads us to the next concept: labor demand.

Labor Demand

Labor demand refers to the number of workers that producers in a specific industry are willing to hire at different wage rates. As chocolate prices rise, producers aim to boost production. However, increased production necessitates more labor; thus, producers will look to hire more workers to meet the heightened demand for chocolate.
This increased need for labor shifts the labor demand curve to the right. Imagine a graph where the X-axis represents the quantity of labor and the Y-axis represents the wage rate. Initially, we'll have the demand curve for labor labeled as D1 and the supply curve of labor as S.
With the rise in chocolate prices and the resulting need for more workers, the labor demand curve shifts to D2. This shift indicates that at every possible wage rate, the quantity of labor demanded by chocolate producers is higher than before. Essentially, chocolate producers now need more workers than they did when the price of chocolate was lower.
In summary, rising chocolate prices increase the demand for labor in the chocolate industry, encouraging producers to hire more workers at each wage rate.

Equilibrium Wage Rate

Equilibrium in the labor market occurs where the quantity of labor supplied equals the quantity of labor demanded. This point is where the supply curve intersects with the demand curve on the labor market graph.
Initially, the equilibrium point is labeled as E1, where the original labor demand curve D1 intersects the supply curve S. At this point, the equilibrium wage rate and the equilibrium quantity of labor are established. However, when the demand for labor increases due to higher chocolate prices, the demand curve shifts to D2.
This shift causes a new intersection point on the supply curve, now labeled as E2. At E2, both the equilibrium wage rate and the quantity of labor employed in the chocolate industry will be higher. The new equilibrium wage rate is the result of increased competition among producers for workers, driving up wages.
This increase in the equilibrium wage rate indicates that workers in the chocolate industry can expect higher wages due to the increased labor demand. Concurrently, more workers will be employed to meet the production needs driven by the high chocolate prices.