Assume initially that the demand and supply for premium coffees (one-pound bags) are in equilibrium. Now assume Starbucks introduces the world to pre- medium blends, and so demand rises substantially. Describe what will happen in this market as it moves to a new equilibrium. If a hard freeze eliminates Brazil’s premium coffee crop, what will happen to the price of premium coffee?
When there are a constant supply and demand for a product, the equilibrium will be at a stable rate. Equilibrium is only affected by a shift in demand or supply of products. Similarly, the induction of a new product in the market will create a shift in the pricing of the product. The equilibrium will change regarding the prevailing conditions (Stone, 2009). Since there is a pre-existing market, there is a demand for the product. The market relies on the premium coffee in the market and accepts it for one pound.
With the induction of premium coffee by Starbucks, the market will be subjected to various changes. First, the demand for premium coffee will rise. This is a new product that is appealing to the market. Secondly, the market demand will only be appealed to by lowly priced products. The new product will be at a lower price, making a positive impact on sales. With such situations in the market, demand for the product will be steady. This is dependent on the supply and pricing strategies, which are substantial.
However, there are possible changes that could occur in the market with a freeze on the premium coffee. When premium coffee is frozen, the demand for the product will be affected (Stone, 2009). First, the market will have to settle for the available options. This will shift attention to the existing coffee products. With such a situation, the demand for coffee products will be met by one product. This will reflect a rise in demand for the product. Eventually, the price of the product will have to rise to counter its escalating demand. In an actual sense, the demand will be on the rise while the supply remains the same (Prasch, 2008). To have better control of the market, sellers will use their pricing technique. With such a drill, buyers with a high bid will get the products.
In late 2006 and early 2007, orange crops in Florida were smaller than expected, and the crop in California was put in a deep freeze by an Arctic cold front. As a result, the production of oranges was severely reduced. Also, in early 2007, President George W. Bush called for the United States to reduce its gasoline consumption by 20% in the next decade. He proposed an increase in ethanol produced from corn and the stalks and leaves from corn and other grasses. What is the likely impact of these two events on food prices in the United States?
With a reduction in the number of oranges produced in the country, there are reasonable outcomes that could be projected. First, people will have a low supply of oranges in the country. Consequently, buyers will have little in their hands to control the supply. Therefore, sellers and suppliers will have a stronger stake in controlling the supply. To make an impact on the supply of oranges, suppliers will have to use a pricing strategy.
Since this is a free-market economy, the pricing will shape the demand for the products. When the supply is low, the price will have to rise. With a rise in the price, people will have to reduce their consumption of oranges (Stone, 2009). Secondly, the demand will shift to other supplementary products. Since the supply of oranges has reduced, the individuals will consider purchasing other products to replace oranges. Since the demand will be spreading in the fruit market, the price will rise (Prasch, 2008). This is a situation in the free market that tries to bring about equilibrium between demand and supply. In the end, pricing will be the only remedy for controlling the demand and supply.
In the scenario of using ethanol from corn, there is a possible change in the food pricing, in the United States. First, with an increase in the use of ethanol, there is a possible increase in the production of corn. With such a situation in the market, corn products will be retailed at low prices as there is an increase in the supply. This will trigger higher consumption of corn products in the market (Stone, 2009).
Secondly, the increase in corn products will reduce the demand for any other supplementary product. Since people will overly rely on corn products, the competitors to corn products will experience a drop in demand. To counter such a situation, competitors will have to reduce their price. With such situational positioning in the market, prices of corn and other supplementary products will reduce.
References
Prasch, R. E. (2008). How Markets Work: Supply, Demand and the ‘Real World’. New York, NY: Edward Elgar Publishing.
Stone, G. (2009). Core Economics. New York, NY: Worth Publishers.