The International Coffee Organization tracks lots of data about coffee worldwide, and one trend is clear: coffee prices are rising. In this post, we use the demand and supply model to understand the market for coffee.
What do the data tell us?
Consider the following data table looking at the quantities traded and prices of coffee in same month of the last three years.
Between 2019 and 2020, the quantity of coffee traded decreased and the price fell. Between 2020 and 2021, the quantity traded decreased again, but the price soared.
What happened to demand?
Governments the world over prevented customers from entering restaurants and cafés during the COVID-19 pandemic, which limited the amount of business these establishments were doing. Between 2019 and 2020, the demand for coffee decreased.
What happened to quantity and price?
A decrease in demand brings a decrease in the equilibrium quantity and a fall in the equilibrium price. The quantity of coffee traded decreased from 11.6 million 60 kg bags to 10.9 million 60 kg bags, and the price fell from $1.06 a pound to $0.98 a pound.
What happened to supply?
In Brazil, people and firms suffered the country’s worst drought in almost a century. In Colombia, anti-government protests restricted exports. The COVID-19 pandemic brought various headaches in the global supply chains for containers and ships. Between 2020 and 2021, these issues limited production in the world’s largest coffee-exporting countries, and the supply of coffee decreased.
What happened to quantity and price this time?
A decrease in supply brings a decrease in the equilibrium quantity and a rise in the equilibrium price. The quantity of coffee traded decreased from 10.9 million bags to 9.8 million bags, and the price rose from $0.98 a pound to $1.60 a pound.
Let’s look at demand and supply in a graph of the market for coffee.
Now take a short quiz to check that you understand what you just read.
Multiple Choice Test: Brewing a Fresh Pot of Price Changes