Looks like the Financial Times could use a high school economics lesson!

May 12 2009

Looks like the Financial Times could use a high school economics lesson!

Published by Jason Welker at 10:56 pm under

FT.com / MARKETS / Commodities – Shortages stir coffee and sugar prices

My favorite economics blog, Environmental Economics, points to an article from the Financial times that appears to make a very elementary mistake in its use of basic economics terminology. Read the excerpt and answer the questions that follow.

Shortages stir coffee and sugar prices
By Javier Blas and Jenny Wiggins in London
Published: May 10 2009

Caffeine addicts face higher prices for their daily fix as the wholesale cost of both coffee and sugar rise sharply because of poor crops and robust demand.

“We are in a dangerous situation,” Andrea Illy, chief executive of Italy’s leading coffee company, told the Financial Times, warning that prices could “explode” due to supply shortages.

Discussion Questions:

Define “shortage”.
Does the rising price of coffee indicate that there are shortages in the market? Why or why not?
Would “poor crops and robust demand” necessarily combine to create a shortage of coffee? Why or why not?
What would lead to a shortage of coffee, based on the economic definition of the term “shortage”.

About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards".

6 responses so far

6 Responses to “Looks like the Financial Times could use a high school economics lesson!”

# Colleen Proppeon 12 May 2009 at 11:19 pm

Hi Jason,

Straight from Wikipedia(easiest, but not the most reliable source), even “A shortage occurs when there is excess demand”… and “Economic shortages are related to price—when the price of an item is “too low,” there will be a shortage.”

I guess “robust demand” would have to be excessive demand”… and the price would also have to be “too low”… can you explain further?

Thanks. Always good to learn something from you, Jason!

-Colleen
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# Jason Welkeron 13 May 2009 at 4:45 am

Hi Colleen,
Thanks for the comment! You’re on the right track with your answer… let’s wait and see if my students can provide the answer for you (hint: if the price of coffee has increased like the article says it has, that’s evidence that there may not really be shortages!)
Enjoyed your comment!
Jason
# Economic Education – Option A, I don’t care how the table was created « learn4kickson 14 May 2009 at 3:03 am

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# Christian Clausenon 19 May 2009 at 4:37 pm

1. Define “shortage”.

A shortage is when the quantity supplied does not meet the quantity demanded.

2. Does the rising price of coffee indicate that there are shortages in the market? Why or why not?

A shortage is usually a result of prices being too low, causing quantity demanded to be higher than quantity supplied. This suggests that there could indeed be a shortage in the market. However, since caffeine is addictive, the producers of coffee could easily increase the price of their good, without decreasing much of the demand. This is because that their consumers are likely to be slightly addicted to this good, making demand very inelastic.

4. What would lead to a shortage of coffee, based on the economic definition of the term “shortage”.

A price below the equilibrium price.
# Janne J.on 27 Sep 2009 at 5:16 pm

A shortage occurs when the demand of a certain product is higher than the supply, meaning there is not enough product. Rising prices does not mean that there is a shortage of a product, rising prices simply means that the demand of a product is rising, therefore the price rises. Poor crops and robust demand doesn’t necessarily mean that there will be a shortage in coffee, although it may be a small factor of it. Shortages of coffee is caused by a increase in demand which was not expected, but after the rising prices more resources will be allocated to coffee and the prices will go back down. A shortage in coffee would occur if the price of the product is too low.