Investigating Coffee Prices

with Sherlock Holmes

DRQ Nov 97 TYS P.261
What are the skills involved?
CASE
DRQ Nov 97 TYS P.261
3-Jun-09 Raffles Institution (JC) 3
G: Glance / scan through all the questions first
R: Read case material & look for evidence that address the
questions (highlight)
A: Analysethe question
P: Plan answer using skills required
E: Evaluate & execute plan for that question
Breakdown into
parts; command
word; key words
& phrases
3-Jun-09 Raffles Institution (JC) 4
G: Glance / scan through all the questions first
R: Read case material & look for evidence that address the
questions (highlight)
A: Analyse the question
D: Design your Plan based on skills required
E: Evaluate & execute plan for that question
Breakdown into
parts; command
word; key words
& phrases
C: Case evidence
A: Apply economics concepts
S: Supplementary materials
E: Evaluate limitations of case
material
It is a capital mistake to theorize before
one has data. Insensibly one begins to
twist facts to suit theories, instead of
theories to suit facts.
Data Response or case study questions are
essentially dealing with application of
economics theories to data and real-world
information given.
Are these theories valid in the real world, or
are there any limitations?
Lets look for the evidence!!
You see, but you do not observe.
(a) Describe the trend in coffee prices
from 1977 to 1992. (2m)
You see, but you do not observe.
(a) Which of the two statements better describe the
trend in coffee prices from 1977 to 1992? (2m)
1. Coffee prices peaked at 225 US cents per lb in
1977, after which it fell in 1978 and rose slightly in
1979. Then prices plunged in 1980 and 1981, rising
gradually from 1982 to 1984 and dropping in 1985.
Prices then rose substantially in 1986, rising a little
in 1988, falling slowly until 1992.
2. From 1977 to 1992, coffee prices experienced an
overall downward trend with fluctuations. However,
there were exceptions where prices rose (slightly)
from 1978 and 1979 and moderately from 1981 to
1986.
You see, but you do not observe.
(a) Which of the two statements better describe the
trend in coffee prices from 1977 to 1992? (2m)
3. From 1977 to 1992, coffee prices fell significantly
by about 70%. However, prices rose (slightly)
from 1978 and 1979 and moderately from 1981 to
1986.
You see, but you do not observe.
(a) Which of the two statements better describe the
trend in coffee prices from 1977 to 1992? (2m)
1. Coffee prices peaked at 225 US cents per lb in 1977, after
which it fell in 1978 and rose slightly in 1979. Then prices
plunged in 1980 and 1981, rising gradually from 1982 to 1984
and dropping in 1985. Prices then rose substantially in 1986,
rising a little in 1988, falling slowly until 1992.
1. Too detailed;
2. Avoid year-on-year description unless stated
You see, but you do not observe.
(a) Which of the two statements better describe the
trend in coffee prices from 1977 to 1992? (2m)
2. From 1977 to 1992, coffee prices experienced an
overall downward trend. However, there were
exceptions. Prices rose (slightly) from 1978 and
1979 and moderately from 1981 to 1986.
Main pattern
Exceptions
Specify time period
You see, but you do not observe.
(a) Which of the two statements better describe the
trend in coffee prices from 1977 to 1992? (2m)
3. From 1977 to 1992, coffee prices fell significantly
by about 70%. However, prices rose (slightly)
from 1978 and 1979 and moderately from 1981 to
1986.
Main pattern
Exceptions
Specify time period
Skills involved in trend questions
(a) Describe the trend in coffee prices from
1977 to 1992. (2m)
Note stipulated time frame
1 mark for main pattern
Upward trend;
Downward trend;
Stable;
Cyclical trend (up and down and up and
down); with fluctuations
1 mark for exception or refinement of trend
(b) With the aid of diagrams, explain
(i) how, according to Extract 1, coffee
growers intended to affect the market
for coffee in 1993. (4m)
I never guess. It is a shocking habit --
destructive to the logical faculty.
(b) With the aid of diagrams, explain
(i) how, according to Extract 1, coffee
growers intended to affect the market
for coffee in 1993. (4m)
2m for explanation: Skills?
2m for diagram accompanied by textual
explanation: Skills involved?
Skills involved in diagram & explain
questions
bi)
The South American
Coffee Producers have
intended to collude
(form a cartel) and
restrict their supply of
coffee, by holding back
20% of their exports
to revive coffee prices.
This causes S0 curve to
shift to S1 curve, ceteris
paribus, raising
equilibrium price from
P0 to P1.
Equilibrium quantity fell
from q0 to q1.
Price of
coffee
p1
p0
q1
q0
Quantity
of coffee
s1
s0
d
bi)
The impact on total
revenue depends on
the price elasticity of
demand for coffee.
If demand for coffee is
price inelastic, total
revenue will rise.
However, if demand for
coffee is price elastic,
total revenue will fall.
In this case
Price of
coffee
p1
p0
q1
q0
Quantity
of coffee
s1
s0
d
B) With the aid of diagrams,
ii) explain how, according to Extract 2,
the Brazilian Coffee Growers explained
the rising coffee prices of 1994. (4m)
I never guess. It is a shocking habit --
destructive to the logical faculty.
Speculation
The act of knowingly investing funds in
a venture carrying higher-than-average
risks in the hope of making above-
average profits. Speculators expect to
make a profit because of price changes
Financial speculation involves the
buying, holding and selling of stocks,
bonds, commodities, currencies,
collectibles, real estate, derivatives or
any valuable financial instrument to
profit from fluctuations in its price as
opposed to buying it for use.
bii)
The Brazilian Coffee
growers blamed the
financial speculation,
rather than the effect of
recent frosts for the
increase in coffee prices
of 1994.
It causes speculators to
stock up coffee in
anticipation of rising
coffee prices.
Demand increased from
D0 to D1, ceteris
paribus, causing
equilibrium price to
increase from P0 to P1.
Price of
coffee
p1
p0
q1 q0 Quantity
of coffee
d1
s0
d0
There is nothing more deceptive than an
obvious fact.
C. Use cross elasticity of demand to
explain the suggested relationship
between coffee and soft drinks such as
Pepsi, Coca-cola and Sprite. [4m]
3-Jun-09 Raffles Institution (JC) 26
Structure Content Skills
Introduction
Body
Conclusion
Economic
concepts,
theories,
principles
Diagram
Table
Examples
Command
words
Explain
6W + 1H
Analyse
Evaluate
More techniques: Signalling
Aesthetics
Introduction: Define key terms
Which of the following is the definition for
CED?
1. CED refers to the degree of responsiveness
of quantity demanded of one good to a
change in the price of another good, ceteris
paribus.
2. CED refers to the percentage change in
quantity demanded of one good to a
percentage change in the price of another
good, ceteris paribus.
c.
It is quoted by Greenhalgh that hopes
that coffee would be the new drink of
the young have been lostSprite,
suggesting that the coffee and soft
drinks are substitutes in demand.
CED will be positive, as an increase in
the price of soft drinks, will lead to an
increase in the demand for coffee, vice
versa.
c.
Predict the magnitude of CED
CED maybe high if they are close
substitutes as they are both caffeinated
drinks (in particular coke)
or CED maybe low, as they are not close
substitutes, as coffee and soft drinks tend
to cater to different groups of consumers.
Key is to JUSTIFY your stand.
Cross elasticity of demand
Definition
Formula
Sign & its interpretation
Size & its interpretation
Factors affecting CED
One should always look for a possible
alternative and provide against it. It is the
first rule of criminal investigation.
d. To what extent can agreements about
price and output fixing between primary
producers be
(i)desirable and
(ii)effective? (6m)
One should always look for a possible
alternative and provide against it. It is the
first rule of criminal investigation.
What are the skills involved?
Intro: Explain Primary producers and
Price & Output Fixing
Clarify what is meant by
primary producers
price and output fixing
In this case, it refers to member countries
restrict supply to raise price (as seen in the
evidence that members would be holding back
20 percent of their exports... To revive
prices...
Body: Make a distinction between
desirability and effectiveness.
Desirability:
What does the policy seek to achieve?
Are the outcomes good or not (depends on
perspectives)?
Stabilises prices for both producers and
consumers
Reduces uncertainty and promote businesses.
Body: Make a distinction between
desirability and effectiveness.
Stabilises income of producers
Higher total revenue for producers if demand for
the product is price inelastic.
However, if the product is price elastic in demand,
total revenue will fall.
Evaluate:
Are primary products price inelastic in demand?
Is coffee price inelastic in demand?
Maximising joint profit
Collusion in the form of a cartel can
suppress competition among firms
Desirable for existing firms
Maximise joint profits.
However, undesirable for consumers
Reduces consumer surplus
Body: Make a distinction between
desirability and effectiveness.
Effectiveness: How effective are they in
fixing price and output & in achieving
their intended aim(s)?
Practicality and feasibility of
implementation (Yuh Yiing. 08S07C)
Body: Make a distinction between
desirability and effectiveness.
d.
Effectiveness of the price-output fixing
policy depends on several factors:
Their market power
Latin American producers account for about
60% of world exports.
Availability & cost of storage facilities
Perishable nature of the product
How long can coffee beans be kept?
Is the collusion stable?
Is it possible to sustain the collusion
and for how long?
Body: Make a distinction between
desirability and effectiveness.
d.
In the SR, the incentive to max joint profits will
facilitate collusion price-output fixing
effective
However, in the LR, there is high likelihood
that the agreements will collapse as firms will
be tempted to increase output above their
quota to increase their profit.
Moreover, the high price will attract new firms
(producers) to join the market, and hence,
increases output further.
In the LR, supply increases, price drops, price and
output fixing policy may not be effective in the LR.
d.
Conclusion: Make a stand and justify
your stand
In conclusion, whether price and output fixing is
desirable depends on
In this case, it is
The extent to which price and output fixing will
be effective depends on
In this case, it is
Scroll down
d.
Conclusion: Make a stand and justify
your stand
Bring in other strategies that will help to achieve
the intended aim
Evaluation: Short run vs long run strategies
3-Jun-09 Raffles Institution (JC) 45
Structure Content Skills
Introduction
Body
Conclusion
Economic
concepts,
theories,
principles
Diagram
Table
Examples
Command
words
Explain
6W + 1H
Analyse
Evaluate
More techniques: Signalling
Aesthetics