The Business Standard: Low-end chocolate makers upbeat on demand
In the article, a shift in the domestic food habits of the Indian consumer is leading to an increase in demand in the chocolate market of India, a well established area of cocoa production. Due to this increased popularity of chocolate consumption, the country’s cocoa imports are being increased. Because a new profitable market has been found, domestic production will be increased by 63 percent, 10,000 to 16,000 tonnes. In comparison, India’s annual cocoa demand is estimated to be 18,000 tonnes; 2,000 tonnes will be imported. The increase is demand is due to the increased prosperity of the population in the region.
Overall demand of chocolate and therefore cocoa has increased. The supply and demand curves for the chocolate market are shown below; one before the increased demand and another portraying the increase itself.
The increase in demand signifies an increased desire for chocolate, and this shifts the demand curve to the right. The supply and demand curves now meet at the new equilibrium point B, ensuing in both higher prices and quantities for chocolate; P1 has moved to P2, and Q1 has now increased to Q2. To meet this increased demand, the country plans to increase domestic cocoa production. This increase in supply, however, may not occur in the short-term. This is because in the short-term, a firm can only configure its variable resources i.e. labor. To significantly increase cocoa production, the firm must plan long-term expansions which will increase capital such as cocoa bean machinery and land i.e. larger cocoa plantations - the supply curve will shift to the right.
The increase in supply responding to the increased demand for chocolate has caused the equilibrium point to shift down to the right from B to C. Resulting is a further increase in quantity from Q2 to Q3, and a lowered the price from P2 back to P3, the same previous price as P1. Therefore, ceteris paribus, by responding to the increase in demand, suppliers have been able to produce more for the same price as before which benefits the consumer. This is a necessary economic decision for India; according to Cadbury India, cocoa requirement is growing about 15 percent annually, and may grow to an average of 30,000 tonnes in 5 years. If demand kept increasing and no increases of supply were made, costs would rise and there would be an eventual shortage of chocolate.
The article states, “the market is still in its early stages”; there is much room for expansion and improvement. As long-term expansions are made and new suppliers enter the market, technological improvements could follow. Technology is a determinant of supply; the introduction of new, efficient machinery in Indian cocoa plantations could indicate a further increase of supply and a shift of the curve to the right.
Chocolate is considered a normal good in countries where chocolate consumption is regular; it is more of a luxury in a country which is less prosperous, such as India. The article clearly states that chocolate is considered a luxury good, “Chocolate consumption is gaining popularity in the country due to increasing prosperity”. If chocolate consumption is increasing due to increased wealth of the population, we can deduce that the Indian people see chocolate as a good that is only obtainable with higher incomes. This would also mean that chocolate is an elastic good. Elasticity is the measure of the responsiveness of consumers or producers to a change in price of a good, related good, or income. If demand for chocolate is elastic, it is a good which will have an increased demand if consumer’ incomes increase.
Perhaps chocolate consumption can indicate the financial stability of an economy, much like GDP can. Deciding which indicator is more precise, however, can be difficult. GDP is a very macro view on the economy of a nation, taking total production into consideration. Chocolate consumption, on the other hand, focuses on the financial stability of every citizen (consumer) in a nation’s economy. Furthermore, chocolate consumption only displays interesting results in emerging and transforming economies such as India, whilst GDP gives a more dependable outline of every nation regardless of it’s economic situation; chocolate demand is known to increase during economic difficulties.
March 4th, 2009 at 9:12 am
Interesting post and analysis.
The production of cocoa is very unstable; there are bad years, where a farmer may end up with very little cocoa and good years. Because cocoa can easily be stored when dried up, many cocoa farmers actually store the excessive amount produced in good years, to be able to sell dried cocoa in the bad seasons. With this technique, they can also somewhat control the price of chocolate. When chocolate refiners like Nestle offer a low price for the dried cocoa, it sometimes becomes more profitable for the farmers to storage the cocoa, and create a shortage which makes the price go up. This obviously wouldn’t work if there were many smaller farmers selling to Nestle, but there are large cocoa land owners that can collude to create shortages.
I wonder how this would change if there was a disease epidemic that would limit the production of chocolate for a long term; because of chocolate’s elasticity, it would be hard for Nestle to increase the price of chocolate drastically, without losing many consumers.