Free Slides from Ed Dolan’s Econ Blog Chocolate Lovers Keep Nervous Watch on Volatile Cocoa Prices Post prepared October 10, Terms of Use: These slides are made available under Creative Commons License Attribution— Share Alike 3.0. You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishers.Attribution— Share Alike 3.0 Introduction to Economics

The Long Rise in Cocoa Prices  The world price of cocoa, the chief ingredient in chocolate, has been on a long upward trend  August 2010 data from the International Cocoa Organization showed prices down some 13% from the peak reached in December 2009, but prices remained volatile  Chocolate lovers watched nervously—will chocolate become a luxury good? Post P from Ed Dolan’s Econ Blog

Strong Income Elasticity  One factor driving chocolate prices higher has been strong income elasticity of demand  In the US, a 10% increase in income has been estimated to raise per capita chocolate consumption by 9.2%  In Europe income elasticity is about half that, but chocolate is still a normal good— higher income leads to greater consumption Post P from Ed Dolan’s Econ Blog What could be more luxurious? Photo by Simon James Kent, The elasticity data in this post are based on a study by Henri Jason, “Trends in Cocoa and Chocolate Consumption with Particular Reference to Developments in the Major Markets,” Malaysian International Cocoa Conference, Kuala Lumpur, October 1994 (ICCO, ED(MEM) 686). Data from the paper, but not the original paper itself, can be found on line at

Question: How Does Positive Income Elasticity Affect Price? If chocolate is a normal good, how will an increase in consumer income affect its market price?  Does the demand curve shift? If so, show the new demand curve as D 2  Does the supply curve shift? If so, show the new supply curve as S 2  Show the new equilibrium price as P 2 Post P from Ed Dolan’s Econ Blog

Answer: How Positive Income Elasticity Affects Price  If chocolate is a normal good, an increase in consumer income will shift the demand curve to the right. The new demand curve is shown here as D 2  Other things being equal, an increase in consumer income will not cause a shift in the supply curve  The market moves long the supply curve until a new equilibrium price is reached at the level P 2 Post P from Ed Dolan’s Econ Blog

Short-Run Supply Effects: Growing Conditions  Cocoa supply, like that of any farm product, is subject to changes in growing conditions  For example, in 2010, a virus causing stunted shoot disease threatened the crop in the Ivory Coast, the world’s biggest producer  The virus causes the leaves to turn red and fall off, and ruins the pods  At the same time, in neighboring Ghana, the second largest producer, favorable weather indicated good prospects for the harvest Post P from Ed Dolan’s Econ Blog Healthy Cocoa Pods Photo source:

Question: How Do Poor Growing Conditions Affect Price? Suppose bad weather or a virus damages the cocoa crop. How will the market price be affected?  Does the demand curve shift? If so, show the new demand curve as D 2  Does the supply curve shift? If so, show the new supply curve as S 2  Show the new equilibrium price as P 2 Post P from Ed Dolan’s Econ Blog

Answer: How Growing Conditions Affect Price  Poor growing conditions will cause the supply curve to shift to the left, for example, from S 1 to S 2 as shown here.  Other things being equal, growing conditions will not affect the demand curve  The market moves long the demand curve until a new equilibrium price is reached at the level P 2 Post P from Ed Dolan’s Econ Blog

Inelastic Demand and Short-Run Price Volatility  Another factor contributing to the volatility of chocolate prices is very inelastic demand  Short-run price elasticity of demand in the US is estimated at -0.2, and even less than that in big consumer countries like France and Germany  When demand is inelastic, even a small shift in the supply curve causes a large change in the market price Post P from Ed Dolan’s Econ Blog Is there any limit to what you would pay for these beauties? Photo by Frank Wouters

Example: Did Armajaro Try to Squeeze the Market?  After dropping from their December high, cocoa prices spiked briefly in July  The spike coincided with an extremely large delivery of cocoa to Armajaro, a London-based commodity trader and hedge fund  Competitors accused Armajaro of attempting a squeeze by holding supplies off the market—a charge Armajaro denied  Squeeze or no, prices jumped, before dropping again in August Post P from Ed Dolan’s Econ Blog For details of the Armajaro episode, see Javier Blas, The Financial Times, Jul 21,

The Bottom Line  The bottom line? You may have to get ready to pay more for your chocolate—or you may not  The complexities of supply and demand are likely to keep chocolate prices volatile  But look at the bright side—if the thought of high chocolate prices depresses you, just remember that chocolate itself is a reliable cure for depression! Post P from Ed Dolan’s Econ Blog