Dec 3, 2019
The price of cocoa, the key ingredient of chocolate, has soared.
Why?
Given the almost universal love of chocolate, our team at Econ Eye thinks it’s a good idea to find the answer.
Start with some facts. The table provides data for 2000 and 2020, which show that the quantity of cocoa produced increased by 90 percent from 3 million tons in 2000 to 5.7 million tons in 2020, and the price of cocoa doubled from $1,500 a ton to $3,000 a ton.
A rise in the cocoa price can be the result of an increase in the demand for cocoa or a decrease in the supply of cocoa.
What is happening?
When the supply of cocoa decreases, the supply curve shifts leftward and a movement occurs up along the demand curve. The equilibrium price of cocoa rises, and the equilibrium quantity decreases. The data don’t support this explanation because the equilibrium quantity didn’t decrease.
When the demand for cocoa increases, the demand curve shifts rightward and a movement occurs up along the supply curve. The equilibrium price of cocoa rises, and the equilibrium quantity increases. This explanation is supported by the data. The price of cocoa has risen and the quantity has increased!
Why has the demand for cocoa increased?
To answer this question, we need to know if cocoa is a normal good or an inferior good.
A normal good is a good for which demand increases when income increases. An inferior good is a good for which demand decreases when income increases.
Think about your demand for chocolate. If you are like most of your friends, when you have more income, you buy more chocolate! Other people around the world are the same. Incomes in China and other developing economies have increased. Chocolate and the cocoa from which it is made are normal goods. So as incomes increased in China and other developing economies, the demand for cocoa increased.
The figure illustrates the market for cocoa.
Now take this short quiz to check that you understand what you have just read.
Mulitple Choice Quiz: Markets for Cocoa and Chocolate.