Question: The table below represents the world supply and demand for natural vanilla in thousands of pounds. A large portion of natural vanilla is grown in Madagascar and comes from orchids that require a lot of time to cultivate. The sequence of events described below actually happened, but the numbers have been altered to make the calculations easier (See James Altucher, "Supply, Demand, and Edible Orchids," Financial Times, September 20, 2005, p.12). Assume the original supply and demand curves are represented in the table below.
a. Graph both the supply (S0) and demand (D0) curves. What is the current equilibrium price? Label that point a.
b. Assume that Madagascar is hit by a hurricane (actually occurred in 2000), and the world's supply of vanilla is reduced by 5/6, or 83%. Label the new supply curve (S1). What will be the new equilibrium price in the market? Label that point b.
c. Now assume that Coca-Cola announces plans to introduce a new "Vanilla Coke," and this increases the demand for natural vanilla by 25%. Label the new demand curve (D1). What will be the new equilibrium price? Label this new equilibrium point
d. Remember that supply of natural vanilla was reduced by the hurricane earlier.
e. Growing the orchids that produce natural vanilla requires a climate with roughly 80% humidity, and the possible grower countries generally fall within 20° north or south of the equator. A doubling of prices encouraged several other countries (e.g., Uganda and Indonesia) to begin growing orchids or up their current production. Within several years, supply was back to normal (S0), but by then, synthetic vanilla had replaced 80% of the original demand (D0). Label this new demand curve (D2). What is the new equilibrium price and output?
