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Chapter 12: Problem 11

In \(2015,\) cocoa prices rose 13 percent from the previous year, the fourth straight year in which prices increased. However, by the end of 2016 cocoa prices fell. Edward George, the head of research at Ecobank, commented, "Everyone's like, wow. There's a lot of cocoa out there." Much of the world's supply of cocoa beans is grown in West Africa. a. Assume that the market for cocoa beans is perfectly competitive and was in long-run equilibrium in 2012 . Draw two graphs: one showing the world market for cocoa beans and one showing the market for the cocoa beans grown by a representative farmer. b. Assume that there was an increase in the worldwide demand for chocolate in \(2013 .\) In the graphs you drew in part (a), show the short-run effect of the demand increase. c. Explain why the supply of cocoa beans increased and the price decreased in \(2016 .\) Show the effect of this increase in supply on the graphs you drew in part (b).

Short Answer

Expert verified
In the short-term, increase in demand causes price and quantity to increase. The price increase leads to more suppliers entering the market, which in the long run, increases supply, causing price to decrease back to initial and quantity to increase.

Step by step solution

01

Drawing the Initial Scenario

Draw two graphs: one for the world market and one for the individual farmer. Both graphs should have the quantity of cocoa beans on the x-axis and the price on the y-axis. Mark the initial equilibrium price and quantity as \(P_0\) and \(Q_0\) respectively. The supply and demand curves intersect at this point, indicating long-run equilibrium. In the individual farmer's graph, the horizontal line at \(P_0\) represents his marginal and average costs due to perfect competition.
02

Short-run Effect of Demand Increase

On both graphs, the rise in demand for cocoa beans shifts the demand curve to the right from \(D_0\) to \(D_1\). On the market graph, this shift causes the price to rise to a new equilibrium level \(P_1 > P_0\) and quantity \(Q_1 > Q_0\). Correspondingly, in the farmer's graph, the farmer raises production to \(Q_1\) to meet the new demand, earning greater profit, since price \(P_1\) now exceeds average cost.
03

Long-term Supply Adjustment

After 2013, due to higher profits, more farmers enter, the market causing increase in supply. So in the world market graph, the supply curve shifts to the right from \(S_0\) to \(S_1\), which decreases the price level from \(P_1\) back to \(P_0\). Correspondingly, in the individual farmer's graph, with the entry of more suppliers, the price declines back to \(P_0\), and the farmer reduces the output back to \(Q_0\).

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