On the market, prices are determined by demand and supply and it is in continual flux. Demand is the volume of a product that consumer can and wants to buy, and supply is the volume of a product that producers are willing and able to produce. The equilibrium point determines price, but when one factor changes all other variables do as well. This is true of all products, including cocoa and chocolate. Currently there are claims that a worldwide shortage of cocoa, the main raw material needed for all chocolate products, is imminent (Ryan 2015).
When supply is low, prices are likely to rise, however that is likely to result in a drop in demand. Supply is expected to be reduced due to the crop difficulties which lead many cocoa farmers to abandon supply of that commodity for easier crops such as corn or rubber (Ryan 2015). When supply is high, then prices are likely to be reduced, which is likely to raise demand but reduce the attractiveness of production. This has the potential to ultimately reduce supply as producers move to other crops and supply shift to the left, raising prices for cocoa and therefore chocolate. Higher prices would reduce demand, and a new equilibrium price would be determined on the market.
Demand for chocolate increases in a sharp spike for specific times of the year such as Christmas, Valentine’s Day, Easter and Halloween. Producers prepare supply specifically for this demand, and the equilibrium price is higher due to the demand shift to the right.
If there is a shortage of supply of cocoa which results in increased prices, then consumers may choose substitute products for holiday and gift giving. Substitutions could include non-food items or sugar based candy that doesn’t require cocoa. Other trends such as healthy living will play a part in this. If this substitution for chocolate in gift giving were to occur, prices would fall until the extra supply was depleted. As this would further dampen any enthusiasm for cocoa production, the end result might be a permanent shift of supply to the left. If there are little profits, producers turn to more productive projects. This would mean that prices might remain high due to the limited nature of supply.
A focus on healthy lifestyles has been a trend for several decades which may be subtly reducing demand, causing a demand shift to the left and lowering prices, but as previously described any short run or persistent shifts of demand to the left will likely result in leftward shifts of supply as it becomes a less profitable commodity despite the intensity of effort required.
Concepts in microeconomics such as price elasticity of demand and price equilibrium assist in understanding the factors that affect shifts in supply and demand, affecting equilibrium price and quantity. Price elasticity of demand is the extent, measured in percent, to which a change in price leads to changes in demand. Chocolate could be considered a frequently purchased luxury good, and it can be expected that this commodity shows price elasticity. Packaging and production can be ways to add value, including premier and luxury chocolates, but such secondary production still depends on the raw cocoa market.
The price elasticity of demand affects a consumer’s purchasing decisions as well as the firm’s pricing strategy. They are in constant adjustment with one another. As one goes up or down, decisions must be made by the other. Despite some spikes in demand due to holidays, overall the trend for cocoa and chocolate is lessened demand. As a result, there has been a consistent drop of production.
As it is a difficult and intensive agricultural crop it is difficult to entry to production. For this reason it can be expected that by 2020 there will be less supply. What remains to be seen is the interaction of variables which result in demand. It could be that the result is the price of cocoa and chocolate rises, as it becomes a more luxurious good. The other possibility is that improved methods of production and fewer producers results in economies of scale and increased competition. If prices can be kept low, demand may stay steady or decrease at a rate in comparison to supply which keeps prices steady or low.
Concepts in macroeconomics such as the exchange rate and the net export effect assist in understanding the factors that affect shifts in supply and demand of cocoa for chocolate, affecting equilibrium, price and quantity. Cocoa is produced mostly in emerging economies. These economies are currently the most rapidly growing. The net export effect states that success in an economy results in inflation and rising prices and better exchange rates, and therefore the goods that are produced become comparatively more expensive for the foreign markets where they are sold.
This rise in price for macroeconomic reasons causes an adjustment in demand to the left, which puts further pressure on supply. This also results in a shift of the supply curve to the left. It can therefore be expected that as quality of life rises and economies grow in Africa, the cost of cocoa will rise due to higher costs of production, higher exchange rates as well as decreased supply.
Surplus and shortage are important to understanding shifts in the price of cocoa, and the price of cocoa is also important to a determination of the surplus and shortage of cocoa. This influences greatly the supply and price of chocolate.
- Ryan, L. (2015). “Chocolate shortage, but no cocoa apocalypse”, March 30, 2015. Star Tribune. Retrieved from: http://www.startribune.com/lifestyle/298022771.html
