Krugman2e_Ch03 - chapter: 3 > Supply and Demand V IEW W...

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W O R L D V I E Supply and Demand 61 >> 3 WAKE UP AND DON’T SMELL THE COFFEE chapter: OR THOSE WHO NEED A CAPPUCCINO, MOCHA latte, or frappuccino to get through the day, cof- fee drinking can become an expensive habit. And on October 6, 2006, the habit got a little more expensive. On that day Starbucks raised its drink prices for the first time in six years. The average price of coffee beverages at the world’s leading chain of coffeehouses rose about 11 cents per cup. Starbucks had kept its prices unchanged for six years. So what compelled them to finally raise their prices in the fall of 2006? Mainly the fact that the cost of a major ingredient—coffee beans—had gone up significantly. In fact, coffee bean prices doubled between 2002 and 2006. Who decided to raise the prices of coffee beans? Nobody: prices went up because of events outside any- one’s control. Specifically, the main cause of rising bean prices was a significant decline in the supply of coffee beans from the world’s two leading coffee exporters: Brazil and Vietnam. (Yes, Vietnam: since the 1990s, a country best known to Americans as a place we fought a war has become a coffee-growing giant.) In Brazil, the decline in supply was a delayed reaction to low prices ear- lier in the decade, which led coffee growers to cut back on planting. In Vietnam, the problem was weather: a prolonged drought sharply reduced coffee harvests. And a lower supply of coffee beans from Vietnam or Brazil inevitably translates into a higher price of coffee on Main Street. It’s just a matter of supply and demand. What do we mean by that? Many people use “supply and demand” as a sort of catchphrase to mean “the laws of the marketplace at work.” To economists, however, the concept of supply and demand has a precise meaning: it is a model of how a market behaves that is extremely use- ful for understanding many—but not all—markets. In this chapter, we lay out the pieces that make up the supply and demand model, put them together, and show how this model can be used to understand how many— but not all—markets behave. Reduced coffee bean production in Vietnam inevitably translates into higher coffee prices at your local Starbucks. JedJacobsohn/GettyImages ©SteveRaymer/Corbis F
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62 PA R T 2 SUPPLY AND DEMAND Supply and Demand: A Model of a Competitive Market Coffee bean sellers and coffee bean buyers constitute a market—a group of producers and consumers who exchange a good or service for payment. In this chapter, we’ll focus on a particular type of market known as a competitive market . Roughly, a competitive market is a market in which there are many buyers and sellers of the same good or service. More precisely, the key feature of a competitive market is that no individual’s actions have a noticeable effect on the price at which the good or service is sold. It’s important to understand, however, that this is not an accurate description of every market. For example, it’s not an accurate description of the market for cola beverages .
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Krugman2e_Ch03 - chapter: 3 > Supply and Demand V IEW W...

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