Coffee: Supply, Demand, and Equilibrium Price

In the beginning, people drank coffee, and made money from coffee, this is supply and demand at the most basic form. The relationships between supply and demand determine the price, and economists call this the equilibrium price. Equilibrium basically is known as balanced, so as you can imagine, prices fluctuate, and this is why. Here is a basic chart of supply and demand, and how prices are determined.

Back before Starbucks went into business, there was too much coffee being produced that the prices were driven below the production costs. People were losing money on coffee because coffee prices were very high before this, and coffee producers flooded the market, while people still only drank the same amount of coffee. Economists see this as a situation where supply moved up, and demand stays the same. This will cause a drop in prices, like you can see on this chart.

Coffee prices went down even further, probably because there was so much of it getting old and stale that people did not want to buy it or they already had way too much on their shelves at home, and this made the coffee industry have its own little depression because coffee was coming to a halt around the world. This is when places like Starbucks came into business and the five dollar cup of coffee was born. Location is everything, and coffee houses started popping up in the “high rent” districts around the country, and possibly around the world. Economists see this as an increase in demand, while supply stays the same. This would cause the new equilibrium price of coffee to meet at the point of Demand 2, and Supply 2 in the chart below:

As you can imagine, the $5 cup of coffee made coffee producers excited again, so they made a lot more coffee and flooded the market with so much coffee that the prices were driven lower again, while the consumer still wanted more, and there were probably experiments with the $7 cup of coffee out in the market. Economists would see a bigger supply, with an even bigger demand. On a chart one would look at the demand curve 3, and supply curve 3, to come up with equilibrium price 4. So the coffee makers were almost as good as they used to be , if you can still make out the original equilibrium price, and they still had to make more to make just a little less than they did 20 years ago.

Well, the best coffee is grown in tropical areas, and tropical areas are known for having some pretty crazy weather from time to time, and some bad weather knocked out quite a few farms, so they could not deliver as much coffee for a while, and there was a shortage of coffee at a time when there was a high demand. Economists will see this by looking at demand 3, supply 4, and they will see how the decrease in supply raises prices, and how kind Mother Nature is to people who care about, and use her gifts properly.

The demand curve slopes downwards, and the supply curve goes up. Where they meet is the equilibrium price. When supply increases, the “supply curve” line moves away from 0, and when it decreases it goes towards 0. The same is true for the demand curve line. This is the macroeconomics behind how you spend your money on the microeconomics level is determined and controlled.