Next, analyze the following scenario that deals with what happened in the coffee industry at the beginning of the last decade:
In the early part of the last decade, there was an overproduction of coffee. The price dropped so low that producers' costs were higher than the market price. The reason this happened was that market prices became high before this, and the supply of coffee increased substantially. In the meantime, demand for coffee and everything else remained the same.
Coffee prices, as a supply input, went down. In the meantime, gourmet coffee houses began appearing, which began charging a premium for coffee in the period of decreasing prices. Gourmet coffee houses tend to open in high-rent areas and cater to higher income consumers. Because of the change they created for taste and preferences and the higher income market, the gourmet coffee houses had a win-win in a period of falling wholesale prices and increasing retail prices.
- Explain the changes in the supply and demand creating a supply and demand curve based on the above information.
- In this graph, be sure to demonstrate how these changes affected the price and quantity levels of supply and demand.
- Based on this analysis, how were coffee retailers faring in the marketplace?