Question

You have been hired by the government of Kenya, which produces a lot of coffee, to examine the supply of gourmet coffee beans. Suppose you discover that the price elasticity of supply is \(0.85 .\) Explain this figure to the Kenyan government.

Short answer

The supply of gourmet coffee beans is inelastic with an elasticity of 0.85, meaning supply does not respond quickly to price changes.

Step-by-step solution

Understanding Supply Elasticity

The price elasticity of supply measures how responsive the quantity supplied of a good is to a change in its price. It is calculated as the percentage change in quantity supplied divided by the percentage change in price.

Interpreting Elasticity Value

The given elasticity of supply is 0.85. This means that for every 1% increase in the price of gourmet coffee beans, the quantity supplied increases by only 0.85%. This indicates that the supply of gourmet coffee beans is relatively inelastic.

Implications for Supply Decisions

Since the elasticity is less than 1, the supply is not very responsive to price changes. This can imply that factors such as production time, availability of resources, or investment costs may limit the ability of producers to increase supply quickly in response to price changes.

Conclusion on Supply Characteristics

An elasticity of 0.85 suggests that producers may not rapidly increase output in response to higher prices, which can affect how supply decisions are made. For the Kenyan government, this means they might need to focus on improving production efficiency or find ways to reduce constraints on supply to enhance responsiveness.

Key concepts

Supply Inelasticity

When we talk about supply inelasticity, we are looking at how much or how little the amount of a product that producers are willing to produce and sell changes when the market price changes. In the case of gourmet coffee beans, the price elasticity of supply is calculated at 0.85.
This tells us that the supply is relatively inelastic, since any change in price results in a less than proportional change in the quantity supplied.

Factors contributing to supply inelasticity can include:

• Time needed to grow and harvest coffee beans.
• Limited arable land suitable for coffee plantations.
• High costs of labor and specialized farming equipment.
• Disease risks and climate variability affecting yields.

For Kenyan coffee farmers, these factors might make it hard to quickly increase their production when prices rise.
In situations where supply is inelastic, farmers and the government need to strategize on how to handle potential shortages or plan investments in agricultural innovations.

Gourmet Coffee Beans

Gourmet coffee beans are specialty coffees known for their unique flavors and high-quality production processes. These beans, often grown in specific regions, require particular care during cultivation and harvesting to attain their premium status.

Characteristics of gourmet coffee beans include:

• Exceptional flavor profiles due to rich soil and ideal growing conditions.
• Stringent quality controls during processing and distribution.
• Higher value on the international market due to their unique tastes and limited supplies.

Gourmet coffee's niche status often means that supply can't be increased quickly, contributing to its inelasticity.
For Kenyan farmers, balancing the demand for gourmet coffee with their ability to produce it sustainably is crucial for maximizing their revenue.

Kenyan Coffee Market

The Kenyan coffee market is renowned worldwide for its high-quality Arabica beans, a key player in the global gourmet coffee scene. With its rich volcanic soils and suitable climate conditions, Kenya is one of the leading countries in specialty coffee production.

Key features of the Kenyan coffee market include:

• Emphasis on high-quality beans that are sold at premium prices.
• Smallholder farms that dominate the production landscape.
• Significant economic reliance on coffee as both a source of national revenue and individual livelihoods.
• Government regulations and cooperatives that play crucial roles in supporting farmers.

Due to its market position, Kenya must continuously adapt to changes in global coffee trends and address challenges such as supply chain efficiency and fair trade practices.
Enhancing the competitiveness of the Kenyan coffee market requires addressing supply constraints and ensuring that all stakeholders in the supply chain benefit from tariff and price improvements.