May 12 2009

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

Published by at 10:56 pm under Price Theory,Product markets,Supply/Demand

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:

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

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

6 responses so far

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

  1. […] Economics Econ4u Baseline Scenario InDebtEd * http://hadm.sph.sc.edu/Courses/Econ/Tutorials.html Don’t recommend as a start if new to economics http://www.investopedia.com/university/ Tutor2u Don’t recommend as a start if new to economics Welker’s Wikinomics  […]

  2. Colleen Proppeon 13 May 2009 at 12:19 am

    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

  3. Jason Welkeron 13 May 2009 at 5:45 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

  4. […] Economics Econ4u Baseline Scenario InDebtEd * http://hadm.sph.sc.edu/Courses/Econ/Tutorials.html Don’t recommend as a start if new to economics http://www.investopedia.com/university/ Tutor2u  Don’t recommend as a start if new to economics Welker’s Wikinomics   […]

  5. Christian Clausenon 19 May 2009 at 5:37 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.

  6. Janne J.on 27 Sep 2009 at 6:16 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.