Question

Consider the following passage from an article in the New York Times on March \(9,2011,\) "In the last few years, coffee yields have plummeted here [Colombia] and in many of Latin America's other premier coffee regions as a result of rising temperatures and more intense and unpredictable rains, phenomena that many scientists link partly to global warming... [while] global demand is soaring as the rising middle classes of emerging economies like Brazil, India and China develop the coffee habit." Illustrate the impact of these events in a supply and demand diagram of the global market for coffee. Ceteris paribus, can we determine the direction of change in equilibrium quantity? Of equilibrium price? Explain briefly.

Short answer

The equilibrium price in the global coffee market will definitely rise, due to increased demand and decreased supply. The change in equilibrium quantity, however, cannot be definitively determined from the information given and depends on the relative magnitudes of the shifts in the supply and demand curves.

Step-by-step solution

Define the current market state

The current market is characterized by stable supply and demand. This is represented by supply (S_old) and demand (D_old) curves intersecting, setting the equilibrium price (P_old) and quantity (Q_old).

Interpret changes in supply

From the text, we understand that coffee yields, i.e., the supply is diminishing due to rising temperatures and unpredictable rains. These factors lead to a decrease in supply, causing the supply curve to shift to the left (S_new).

Interpret changes in demand

The text also mentions a rise in demand due to emerging economies developing a coffee habit. The increased demand causes the demand curve to shift to the right (D_new).

Analyze Change in Equilibrium

The shifts in both supply and demand curves cause changes to the equilibrium price and quantity. The intersection of S_new and D_new gives the new equilibrium price (P_new) and quantity (Q_new). The decrease in supply (shift to left) alone would increase the price and decrease quantity, whereas the increase in demand (shift to right) would increase both price and quantity.

Determine the direction of change

The combined effect of decreased supply and increased demand is definitely an increase in price (P_new > P_old). However, the change in equilibrium quantity is ambiguous. It will depend on the relative magnitudes of the shift in supply and demand curves, we can’t say for certain whether the quantity increases or decreases (Q_new compared to Q_old is uncertain).