Chocolate Makers’ Prospects Sour as Cocoa Prices Spike

EconEye Admin

3 years ago

The chocolate industry has enjoyed bumper profits and higher prices recently, but retailers are starting to push back on high-quality chocolate producers. Consumers are looking for deals, and lower priced ‘private label’ chocolate is picking up market share. Now cocoa prices are rising as cocoa producers face ongoing drought and disease.—reuters.com

Answer the following questions to check your understanding of the story.

In what type of market do chocolate producers operate and what is the effect on a high-quality chocolate producer as retailers “push back” in response to consumers moving to lower priced ‘private label’ chocolate?

Chocolate producers sell in ____________, and as retailers “push back”, a high-quality chocolate producer lowers the price of chocolate and sells a ____________ quantity.

a) perfect competition; smaller

b) monopolistic competition; smaller

c) perfect competition; larger

d) monopolistic competition; larger

Wrong! - What are the characteristics of monopolistic competition and perfect competition? Which market type describes the market in which chocolate producers operate?

As retailers “push back”, the demand for high-quality chocolate decreases. A chocolate producer maximizes profit by setting the marginal cost of production equal to marginal revenue and charging the highest price that retailers will pay. As the price of chocolate falls, how does the quantity of chocolate sold change?

Well Done! - Chocolate producers sell in monopolistic competition—a large number of firms that make similar but slightly different chocolate compete on product quality, price, and marketing, and firms are free to enter or exit the market.

As retailers “push back”, the demand for high-quality chocolate decreases. A chocolate producer maximizes profit by setting the marginal cost of production equal to marginal revenue and charging the highest price that retailers will pay. With a decrease in demand, the chocolate producer charges a lower price and sells a smaller quantity of chocolate.

What is the effect of rising cocoa prices on a chocolate producer?

Rising cocoa prices increase the chocolate producer’s ____________.

a) marginal cost, so the producer raises the price and sells a larger quantity of chocolate

b) fixed cost, so the producer doesn’t change the price or quantity sold

c) total cost, so the producer raises the price but sells the same quantity of chocolate

d) marginal cost, so the producer raises the price and sells a smaller quantity of chocolate

Wrong! - Is a change in the price of cocoa a change in marginal cost, variable cost, or fixed cost for the chocolate producer? How does a chocolate producer respond?

That's Right! - When the price of cocoa rises, a chocolate producer’s marginal cost increases. To maximize profit, the chocolate producer sets marginal revenue equal to the new higher marginal cost, raises the price, and sells a smaller quantity of chocolate.

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