A surge in green coffee prices

PREPARE ANSWERS TO THE FOLLOWING QUESTIONS IN PREPARATION FOR THIS SEMESTERS FINAL EXAM

10th June open book on-line 2 -5 pm Worth 50%

 

 

 

 

Question 1 (10 Marks)    (SEE LECTURE 2)

Why your cup of coffee could be about to jump in price

Crops in top producer Brazil have suffered worst drought in almost a century.

A surge in green coffee prices may soon begin percolating into costs paid by consumers for their daily caffeine fix, in the latest sign of how hot commodity markets are affecting the broader global economy. Coffee bean prices on international markets have surged as crops in top producer Brazil have been damaged by the worst drought in almost a century, leading to the first supply shortfall in the coffee market in four years. Anti-government protests in Colombia halted exports earlier this year, further pushing up markets. Is there going to be a shortage of coffee in 2021?

Global coffee consumption is expected to exceed production this year for the first time since 2017, according to the United States Department of Agriculture (USDA). The department expects 165 million bags of beans to be consumed in 2021. That is 1.8 million bags more than last year.

At the start of June, the futures benchmark in New York for arabica, the high-end coffee bean, hit a four and a half year high of almost $1.70 (€1.44) a pound, up almost 70 per cent from a year before.

Source: ‘Why your cup of coffee could be about to jump in price’, Irish Times 7 July 2021,

https://www.irishtimes.com/business/agribusiness-and-food/why-your-cup-of-coffee-could-be-about-to-jump-inprice-

You are provided with 2 graphs below. Each of the 2 graphs contains a set of supply and demand curves for coffee. Select the graph that correctly illustrates the causes of the rise in coffee prices, given the facts in the article above. (2 marks)

 

 

 

Which Graph:

 

 

 

 

 

 

  1. Using the graph, you chose in part 1 above, explain the changes in the market for coffee. In your answer identify the cause(s) of the changes and describe the effects they had on the market for coffee. Make use of the facts from the article in your answer. (4 marks)

 

 

 

 

 

 

 

 

 

 

 

  1. In the article “Coffee Cravers ignoring Bean-Price Surge for Caffeine Fix”, Marvin Perez and Lynn Doan quote a chief international strategist, Paul Christopher, where he says, “There’s a very low price-elasticity-of-demand for coffee”. Based on the statement, is the demand for coffee price elastic or inelastic? (2 marks)

 

 

low price-elasticity-of-demand = < 1

 

 

 

  1. Which of the following demand curve best illustrates the price elasticity of demand for coffee ( <1) ? Explain your answer. (2 marks)

 

 

 

Which demand Curve:

Explanation:

 

 

 

 

Question 2 (10 marks)   LECTURE 3

Pandemic Erased Nearly a Quarter of United States (US) Coffee Shop Market, Report Shows

The COVID-19 pandemic has erased nearly a quarter of the total United States (U.S.) coffee shop market value, according to the latest annual report from coffee market research group Allegra World Coffee Portal. The group now estimates the U.S. coffee shop segment to be worth some $36 billion heading into 2021, down 24% over the past 12 months with $11.5 billion in sales declines. For the first time in modern history, there was also a net decrease in the number of coffee shops over the past 12 months, with the market contracting by 208 shops (0.6%) to comprise

37,189 outlets, according to the research.

Coffee shop operators reporting losses estimated those losses to be $32,500 per store per month on average, according to the group, while just 38% reported current trading as positive, down from 65% last year.

Source: ‘Pandemic Erased Nearly a Quarter of US Coffee Shop Market, Report Shows’ Daily Coffee News 11 January 2021, https://dailycoffeenews.com/2021/01/11/pandemic-erased-nearly-a-quarter-of-us-coffee-shopmarket-report-shows/

 

  1. What is the relationship between total cost (TC) and total revenue (TR) when a coffee shop is making a loss?

(2 marks)

 

 

 

 

 

  1. Based on the following information about businesses in the coffee Cafe industry, what type of industry in an economic sense is this industry (perfect competition or monopolistic competition or oligopoly or monopoly)?

(1 mark)

 

 

 

 

 

  1. Describe two ways in which the coffee Cafe industry is different to one of the other industry types (you need to select and name the two industry types being compared). (2 marks)

 

 

 

 

 

 

 

 

 

  1. Which of the following graphs illustrates a Cafe making a loss in the short run? Explain the choice of your graph. Make use of the information from the article provided above in your explanation. (3 marks)

 

 

 

 

 

  1. What will happen to a Cafe making a loss (due to COVID-19 mentioned in the article above) in the long run? Briefly explain your answer. (1 mark)

 

 

 

 

 

 

 

  1. What do individual Cafes in the coffee industry do to differentiate their product to take sales from their competitors? (1 mark)

 

 

 

 

 

Question 3 (10 marks)  WEEK 8 & 9 Lecture WEEK 10 for last question

The following graph shows the economic cycles of expansion and contraction in an economy (trade cycle diagram).

 

 

 

  1. In economics, we measure the size of an economy through GDP. Name two types of production which are not included in the measure of GDP. (1 mark)

 

 

 

 

 

  1. The GDP of a country can be described by the equation: Y = C + I + G + X – M. What does each letter standard for? (1 mark)

 

 

 

 

 

 

 

 

 

  1. Discuss the main general cause of the expansion and contraction of an economy as depicted by the graph above. (2 marks)

 

 

 

 

 

 

 

 

  1. Given below is data about the Consumer Price Index (CPI) in the Australian economy between 2012 and 2014. CPI rates are published by the Australian Bureau of Statistics (ABS) annually. The CPI reference base year is 2011–12 in the data given below.

 

 

 

 

Calculate the inflation rate for 2014. Show the formulae used and your workings. (1 mark)

  1. B. Is this rate within or outside the Reserve Bank of Australia’s inflation rate target? Briefly explain your answer. (1 mark)

 

 

 

 

 

 

 

 

 

 

  1. If an economy is at point A as indicated in the diagram above, what type of gap would exist in the economy (as indicated by arrow B) – deflationary gap or inflationary gap? (2 marks)

 

 

 

 

 

 

 

 

 

 

  1. Describe 2 key monetary policy actions that may reduce the gap identified in part 5 above.

(2 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 4 (10 marks)

Recession and Fiscal Policy  WEEK 10

The United States (U.S.) is ‘officially’ in a recession – but economists say it’s far from a typical downturn. In April 2020, the unemployment rate reached 14.8 percent – the highest rate observed since data collection began in 1948.

In May 2021, unemployment remained higher (5.8%) than it had been in February 2020 (3.5%).

Due to the COVID-19 pandemic, the U.S. Congress and President Donald Trump had enacted the $2.2 trillion COVID-19 Aid, Relief, and Economic Security Act (CARES Act) on March 18, 2020, which the Committee for a responsible federal budget estimated would be partially responsible for an increase of the budget deficit for fiscal year 2020 to a record $3.8 trillion, or 18.7 percent of GDP.

 

  1. Which Aggregate Supply (AS) and Aggregate Demand (AD) diagram below indicates a situation where a recession (a deflationary gap) exists. Use and refer to the trade cycle diagram illustrated in Question 3 to justify and explain your answer. (4 marks)

 

 

 

 

 

 

 

 

 

  1. Describe and explain using the information provided above and the concepts and theories studied in the course, how the United States (U.S.) government used fiscal policy to close the deflationary gap. (2 marks)

 

 

 

 

 

 

 

 

 

 

 

 

  1. One advantage of fiscal policy is that it operates through automatic stabilisers. Describe the automatic stabilisers and explain how they operate during a recession to help close a deflationary gap. (2 marks)

 

 

 

 

  1. The COVID-19 pandemic triggered an unprecedented change in the oil industry, leading to a historic market collapse in oil prices. In 2020, worldwide demand for oil fell rapidly as governments closed businesses and restricted travel due to the COVID-19 pandemic. An oil price war between Russia and Saudi Arabia erupted in March 2020 when the two nations failed to reach a consensus on oil production levels. In April, an oversupply of oil led to an unprecedented collapse in oil prices, forcing the contract futures price for West Texas Intermediate (WTI) to plummet from $180 a barrel to around -$37 a barrel.

 

Which of the two diagrams given below showing a change in the aggregate supply (AS) or aggregate demand (AD) curve best describes the effect of the change in oil prices on the economy? Briefly explain your answer.

(2 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 5 (10 marks) WEEK 11

How does China control exchange rates?

Unlike many of its international trade partners (who allow the values of their currencies to float freely against others), China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the Yuan (Chinese currency) on the foreign exchange market.

China has customarily used a portion of its reserves to influence the value of its currency through foreign exchange market interventions. To strengthen the Yuan, the Chinese central bank sells foreign currency reserves (typically dollars) into the market. On the other hand, if the country wants to weaken its currency, it uses its local currency to buy foreign currency.

By contrast, in 1983 the newly elected Labour government, with Bob Hawke as Prime Minister and Paul Keating as the Treasurer moved the Australian dollar onto a floating exchange rate. This meant that the dollar was now valued through the supply and demand of money within world currency markets.

Source: ‘How does China control exchange rates?’, FXCM 8 April 2016, https://www.fxcm.com/au/insights/howdoes-

china-control-exchange-rates/

 

  1. An exchange rate is the of one country’s currency in terms of another country’s currency. (1 mark)

 

 

 

  1. An exchange rate is necessary because one country’s currency is not in another country for international trade. (1 mark)

 

 

 

  1. The exchange rate is determined through the forces of ………….and ………….. . (1 mark)

 

 

 

 

 

  1. If the Australian dollar appreciates in value, what will happen to the price of exports (from the perspective of overseas buyers)? Similarly, if the Australian dollar appreciates, what impact will it have on the price of imports (from the perspective of Australian buyers)? (1 mark)

 

 

 

 

  1. Australia has had a floating exchange rate system since 1983. Under a floating exchange rate system, if the value of exports and the inflow of money from the country is greater than the value of imports and the outflow of money from overseas, what will happen to the exchange rate? Will it appreciate or depreciate? Explain your answer by using the relationship between demand and supply and the diagrams provided in part 6 below. (3 marks)

 

 

 

 

 

 

 

 

 

 

 

  1. China uses a fixed exchange rate system, in contrast to Australia’s floating exchange rate system. Assume that China’s receipt of money from exports and inflow of money from foreign investments into China are greater than China’s payments of money for imports and outflow of money for investments overseas. Under these conditions, Chinas currency (the Yuan) should change if they followed a floating exchange rate regime. However, China prevents this from happening under a fixed exchange rate regime.

 

Select the diagram from the two given below which correctly illustrates the situation for China under the conditions described above. Using the selected diagram, explain what China’s central bank does to keep its exchange rate fixed. (3 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Answers to Question 5

 

How does China control its exchange rates?

Unlike many of its international trade partners (who allow the values of their currencies to float freely against

others), China has a strictly controlled currency policy where it regulates trading activity and tries to control daily movements of the Yuan (Chinese currency) on the foreign exchange market.

China has customarily used a portion of its reserves to influence the value of its currency through foreign exchange market interventions. To strengthen the Yuan, the Chinese central bank sells foreign currency reserves (typically US dollars) into the market. On the other hand, if the country wants to weaken its currency, it uses its local currency to buy foreign currency.

By contrast, in 1983 the newly elected Labour government, with Bob Hawke as Prime Minister and Paul Keating as the Treasurer moved the Australian dollar onto a floating exchange rate. This meant that the dollar was now valued through the supply and demand of money within world currency markets.

Source: ‘How does China control exchange rates?’, FXCM 8 April 2016, https://www.fxcm.com/au/insights/howdoes- China-control-exchange-rates/

  1. What is an exchange rate?. (1mark)

The price of one countries currency when it is bought or sold. In a floating ER the price changes. In a fixed ER the price does not change

 

  1. Why when we buy imports from another country do we need to buy or demand their currency? (1 mark)

 

Because our currency is not legal tender in their country so our currency needs to be exchanged for there’s so they can spend their money in their country

 

 

 

  1. How is an exchange rate determined under a floating exchange rate? (1 mark)

By supply and demand for their currency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 6 (10 Marks) Market Failure & Global Warming

Many economists have described climate change as an example of a market failure – though in fact several distinct market failures have been identified.

The core one is the so-called ‘greenhouse-gas externality’. Greenhouse gas emissions are a side-effect of economically valuable activities.

Most of the impacts of emissions do not fall on those conducting the activities – instead they fall on future generations or people living in developing countries, for example – so those responsible for the emissions do not pay the cost. The adverse effects of greenhouse gases are therefore ‘external’ to the market, which means there is usually only an ethical – rather than an economic – incentive for businesses and consumers to reduce their emissions. As a result, the market fails by over-producing greenhouse gases.

Economists concerned about this market failure argue for policy intervention to increase the price of activities that emit greenhouse gases, thereby providing a clear signal to guide economic decision-making at the same time as stimulating innovation of low carbon technologies. To ensure that emissions cuts are spread out across the economy as inexpensively as possible, economists tend to favour policies that ensure that all businesses and households face the same price on carbon– such as a tax on emissions or an emissions trading scheme.

 

1.    Answer the following multiple-choice questions based on the article above (4 marks):

 

1.1 Which of the following does NOT involve market failure?

A.   A perfectly competitive firm

B.   A monopoly

C.   A negative externality

D.  A public good

Answer:

 

1.2 Which of the following is NOT a feature or an example of a public good?

A.   They are excludable.

B.   They are environmental resources that are not paid a price when they are used to produce private goods.

C.   As they are used the supply does not fall so your use of a public good is not reduced by my use.

D.  They are non-excludable.

Answer:

 

1.3 Which of the following is NOT true of externalities?

A.   They can be positive or negative externalities.

B.   They can be corrected or internalised by Pigouvian taxes and subsidies.

C.   The Coase theorem explains how defined property rights and low transaction costs can create free market solutions to their effects.

D.   They only cause a cost or a benefit to the person or business who buys or sells the product.

Answer:

 

1.4 A Free Rider is NOT someone who

A.   receives a benefit without a cost.

B.   Pays their share of the cost of providing a benefit gained by them and a group of consumers or producers.

C.   will underestimate the value of a benefit to pay less than their share of its provision or supply.

D.  includes a shoplifter, tax evader or a thief

Answer:

2.    The following diagram represents the negative externality of global-warming caused by burning fossil fuels like coal creating green-house gases. The diagram is labelled with letters A to D. Match each letter to its correct description given below from 1 to 4. (4 marks)

Descriptions:

1.    The Pigouvian tax on emitters of carbon.

2.    The estimated size of the social cost of carbon emissions.

3.    The effect that the cost of the tax has on producers causing a fall in how much they supply of coal etc.

4.     The effect the increase in the price of products that emit carbon have on the quantity consumers buy.

 

In your answer the number that correctly described the letter in the diagram above.

A:

B:

C:

D:

1.    Use your understanding of the term “Free Rider” to explain the problem with getting all countries to agree to measures to reduce green-house gas emissions. (2 marks)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Question 6  (10 marks) Market Failure & Global Warming Answers

Many economists have described climate change as an example of a market failure – though in fact a number of distinct market failures have been identified.

 

The core one is the so-called ‘greenhouse-gas externality’. Greenhouse gas emissions are a side-effect of economically valuable activities.

 

Most of the impacts of emissions do not fall on those conducting the activities – instead they fall on future generations or people living in developing countries, for example – so those responsible for the emissions do not pay the cost. The adverse effects of greenhouse gases are therefore ‘external’ to the market, which means there is usually only an ethical – rather than an economic – incentive for businesses and consumers to reduce their emissions. As a result, the market fails by over-producing greenhouse gases.

 

Economists concerned about this market failure argue for policy intervention to increase the price of activities that emit greenhouse gases, thereby providing a clear signal to guide economic decision-making at the same time as stimulating innovation of low carbon technologies. To ensure that emissions cuts are spread out across the economy as inexpensively as possible, economists tend to favor policies that ensure that all businesses and households face the same price on carbon– such as a tax on emissions or an emissions trading scheme.

 

1.    Answer each of the following multiple-choice questions by writing the letter of the correct answer next to the number of the question. (4 mark)

1 mark each

1.     Which of the following does NOT involve market failure?

A.   A Perfectly Competitive firm

B.    A Monopoly.

C.    Negative externality

D.   A Public good

 

2.     Which of the following is NOT a feature or an example of a public good?

A.   They are excludable and a price can be charged for their use

B.    They are environmental resources that are not paid a price when they are used to produce private goods.

C.    As they are used the supply does not fall so your use of a public good is not reduced by my use.

D.   Private property laws apply to their use and so no trespassing sign’s or fences or admission charges can legally exclude nonlegal free use of their benefits.

 

3.     Which of the following is Not true of externalities?

A.   They can be positive or negative externalities

B.    They can be corrected or internalised by Pigouvian taxes and subsidies

C.    The Coase theorem explains how defined property rights and low transaction costs can create free market solutions to their effects

D.   They only cause a cost or a benefit to the person or business who buys or sells the product.

 

4.     A Free Rider is NOT someone who

B. receives a benefit without a cost

C. pays their share of the cost of providing a benefit gained by them and a group of consumers or producers.

D will underestimate the value of a benefit in order to pay less than their share of its provision or supply.

E.    includes a shoplifter, tax evader or a thief

 

 

 

 

 

 

1.   A B C D

2.   A B C D

3.   A B C D

4.   A B C D E

 

 

2.    The following diagram represents the negative externality of global-warming caused by burning fossil fuels like coal creating green -house gases.

The diagram is labelled with letters A – D. Indicate what each label represents by matching the numbered label with its correct letter.  (4 mark)

1 mark each

A ……….. 2

B ……….. 4

C ……….. 1

D ……….. 3

1.   The Pigouvian tax on emitters of carbon

2.   The estimated size of the social cost of carbon emissions the costs of global warming

3.   The effect that the cost of the tax has on producers causing a fall in how much they supply of coal etc.

4.   The effect the increase in the price of products that emit CO2 have on the quantity consumers buy.

 

 

 

 

 

 

 

 

 

 

3.    Use your understanding of the term “Free Rider” to explain the problem with getting all countries to agree to measures to reduce green-house gas emissions. (2 marks)
A Free rider is someone who receives a benefit for no cost.  1 mark

Since the atmosphere circulates continuously around the world. If one country reduces their use of fossil fuels like coal (when coal is burnt to generate electricity it creates CO2 (a greenhouse gas that warms the planet)) then every other country benefit but for no cost. They are free riders.

                                                                                                                                             1 mark