Commodities ECO/212 Commodities With the economy growing bigger and bigger, all the commodities that people

rely on to go about their day to day lives does too. Commodities such as: Water, gas , oil, milk, wheat, oats, coffee, sugar, cocoa, and cotton. One commodity that p eople must have even if prices rise or drop is coffee. Team B will discuss the s hifts in supply and demand, and the outcome of these shifts. We will discuss wea ther coffee is a luxury product or a necessity, and see if there is a substitute . Lastly we will discussion of necessity of coffee and the availability of the s ubstitute and how it impacts the price elasticity. Webster New World Finance (2003) describes coffee as one of the most popular dri nks in the world. The coffee bean is not grown in the United States but in tropi cal climates such as Asia, Africa, and S. America. Multiple causes can affect th e shift in supply and demand of coffee. One factor that can affect supply is pro duction surplus of coffee. According to Cruel (2002) Vietnam is almost producing more of the product than the second largest producer for the world, which is Co lombia. Calculations from traders of the commodity expect it to grow worse as 2003 production of coffee was 10% higher than market absorption Cruel (2002). A secon d factor that can affect shift in supply and demand is decreased demand in the f orm of substitution. Energy drinks, colas with caffeine, and even bottled water are beverage substitutions. With the exception of water, these private goods pro vide that caffeine jolt that coffee drinkers crave. Cruel (2002) advises that si nce 1970 coffee consumption has decreased by 45 % and would have been more if no t for the specialty coffee houses like Starbucks. Over the last ten years coffee has taken a beating in the economy due to product ion slows, weather events, and oil prices. Brazil clearly being the largest prod ucer of coffee in the world took several big hits over the last ten years due to frost killing crops between the years of 1994 and 1995 (Capdevila, 2007), and t he rise of the Vietnam coffee producers. Between the years of 1989 and 1994 trem endous amounts of coffee was withheld from the market because of falling prices (Capdevila, 2007). This event caused many problems for coffee producing countrie s, but ultimately caused prices to rebound and created about four to five years of good prices. After this period Vietnam increase their production to become th e number two coffee producers in the world (Capdevila, 2007). Vietnam produces a bout 15 Million bags of coffee per year compared to Brazil whose bag per year pr oduction is 30 to 35 Million. Current production of coffee is now 118 to 200 bag s per year around the world (Capdevila, 2007). Although coffee is the most consumed hot beverage today, the commodity is not a necessity product. Coffee is a luxury product enjoyed and consumed by many. As c offee prices increased, there was very little change in relation to taste. Stimu lating conversations take place over a good cup of coffee. Most consumers will n ot eliminate the morning cup of coffee. Consumption of coffee increased in 1962 and fell in 1988, according to the Busin ess Source Complete (1992). The decline was contributed to the fact that coffee rose in price. Imported coffee demands depended on the elasticity of the United States revenues. A Box-Cox model proved imported coffee was influenced by the ha bit forming impact from consuming coffee. The model result verified how habits i nterfere with price and creates demand more inelastic than in non-habit specific ations. The available substitute for coffee is tea, both consist of caffeine. A product consisting of caffeine is inelastic due to the small existence of substitution.

According to Business Research, there will be a small change in consuming coffee or tea if caffeine prices were to rise as a whole (1992). When the price of cof fee increases, also does the cost of tea, this is considered cross-price elastic ity of demand. Price elasticity measures how sensitive the demand for the goods or services is to their price. Since coffee isn t a necessity, price elasticity is moderate. If the price of coffee rose incredibly, it could have a much greater effect on the dem and. Substitutes could also factor into the demand of coffee. If other caffeinat ed drinks, such as cola, tea, or energy drinks were more reasonably price, consu mers would be inclined to buy them for their caffeine fix. Although coffee isn t a n ecessity, many people in the United States have made it a habit just as a smoker has an addiction to nicotine. In this sense, a coffee drinker may not care abou t the price.

References Capdevila, G. (2007, April). ICO: Coffee Supply & Deand at Equilibrium, Price is Precarious. Retrieved from http://poorfarmer.blogspot.com/2007/04/ico-predicts-equilibrium Coffee. (2003). In Webster's New World Finance and Investment Dictionary. R etrieved December 12, 2010, from http://www.credoreference.com/entry/wileynwfid/coffee Cruel, B. (2002). Latin American Nations Struggle as Increased Coffee Supply Low ers Prices. Knight Ridder Tribune Business News,1. Retrieved December 12, 2010, from http://proquest.umi.com/pqdweb?did=99391571&Fmt=3&clientId=2606&RQT=309&V Name=PQD Okunade, A. (1992). Functional forms and habit effects in the US demand for coff ee. Applied Economics, 24(11), 1203. Retrieved from Business Source Complete database.