Case Study: Demand and Supply Analysis

This Micro paper is designed to apply the theories and principles of Microeconomics to the real world. The paper is divided into two sections. Each section is marked out of 30 and contributes 10% to your final course grade.

Instructions:

• Your response should be typed, with at least 1 ½ line-spacing, and a 12- point font size.
• Where necessary, graphs can be drawn by hand and scanned into document.
• Plagiarising your colleagues' work or allowing your work to be plagiarised will be penalized with a score of zero.

Section A: The Market for Coffee

Read the following four extracts and answer the questions below

Extract 1: Coffee prices on the rise

Coffee prices hit a record 14-year high this month, and it's only a matter of time before coffee lovers will have to pay more in stores and coffee shops. A series of bad news has affected the market for coffee - bad weather in South America is threatening crops; Brazil and Vietnam are talking about hoarding their stocks; and US stockpiles are reportedly at 10-year lows. Moreover, the current behavior of prices reflects uncertainties concerning short-term coffee supplies. As uncertainties persist, investors are placing significant bets on where prices are headed.

Adapted from CNNMoney.com (February 2011)

Extract 2: Colombian government extends subsidies to the coffee sector

In South America, despite a budget deficit, the Colombian government announced a subsidy package in November 2008, aimed at controlling the escalating price of coffee. The subsidy package includes assistance to farmers by extending discounts of up to 50% on fertilizer to farmers and provision of cash credits to farmers for the replacement of old and poor-yielding coffee trees with newer and higher-yielding varieties

Adapted from USDA Foreign Agricultural Service Report (April 2009)

Extract 3: Venezuela maintains strict price regimes on basic foods

Since 2003, the Venezuelan President has maintained a strict price regime on some basic foods like coffee, beans, sugar and powdered milk. But this measure designed to curb inflation has alienated Venezuela's coffee importers who say their profit margins have been reduced to nothing.

For at least a week, there has been no roasted coffee available on the shelves of Venezuelan supermarkets, as wholesalers and coffee importers have been withholding their coffee from sale. The situation is so bad that authorities have successfully stepped in to seize coffee, which is deliberately being withheld from sale.

Yet several food stores in Venezuela's capital city Caracas say the coffee raids are not addressing the fact that shops are also running low on sugar, maize, powdered milk and beans. Store managers insist they are not being supplied with new stock from wholesalers and importers.

Three days ago, street sellers working in the country's black market were still able to provide the roasted coffee that the supermarkets were not stocking. However, even they have since admitted defeat.

Adapted from the BBC (January 2006)

Questions

(a) Using Extract 1, illustrate and explain the impact on the market for coffee in 2011.

(b) Using Extract 2 and 3,

(i) Examine the government intervention In Colombia. To what extent were the objectives of the Colombian government met. Justify your response.

(ii) Examine the government intervention In Venezuela. To what extent were the objectives of the Venezuelan government met. Justify your response.

(iii) Which intervention is more effective? Justify your response.

Section B: Rent Subsidy

Assume there is a well-defined geographic area of a city. The area is composed exclusively of apartments and is populated by low-income residents. The people who live in the area tend to stay in that area because (1) they cannot afford to live in other areas of the city, (2) they prefer to live with people of their own ethnic group, or (3) there is discrimination against them in other areas of the city. Rents paid are a very high percent of peoples' incomes.

(a) Would the demand for apartments in this area be relatively inelastic or relatively elastic? Explain.

(b) Would the supply of apartments in this area be relatively inelastic or relatively elastic? Explain.

(c) Draw the demand and supply curves as you have described them, showing the initial equilibrium price and quantity. Label carefully.

(d) Now assume the government creates a rent supplement program. Under this program, the renter is required to pay 30% of income in rent any additional rent is paid by the government (up to a limit). For example, a low-income person with an income of $1,000 a month would be required to pay $300 in rent (30%). If the rent were $500, the government would pay the other $200. Analyze the results of this program. Show the changes on the graph and explain what will result. Who gains and who loses from this program?

(e) Instead, now assume that the government decides to provide a building subsidy to people who build apartments in this low-income area. The government will pay a certain percent of their costs. Analyze the results of this program. Show the results on the graph and explain what will result. Who gains and who loses from this program?

(f) From the point of view of improving housing for the poor, which is the better public policy? Justify your response.