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.In this particular example, an increase in price is anendogenous change, that is to say within the dimensions of themodel, and its effect can be studied on the dependent variable:causing a fall in demand illustrated by a contraction along thedemand curve.A change in some other factor outside themodel, in this example advertising, is an exogenous change andthis causes the relationships between the two original variablesto shift.The distinction between endogenous (internal) andexogenous (external) changes is important and will be referredto continually through this text.© 2004 Tony Cleaver Box 2.6 Coffee prices: part 1All this analysis may seem a bit pedantic but, as you will seelater on, it is actually important in separating out causes andeffects of major crises in world markets.A quick example shouldhelp explain.Coffee is (after oil) the world s second most impor-tant traded commodity.The livelihood of 25 million smallproducers and more than half-a-billion other people linked tothe coffee trade in poor countries is directly influenced by theprice of coffee.At the time of writing, the world price of coffee isclose to a 100-year low depressing the incomes, and lives, ofmillions.Additionally, prices over the last twenty years have beenvery volatile hurting particularly the smaller farmer who cannotinsure against risk.Is the price low because world demand is low or has someother factor caused the slump in prices? And what causes thesudden and great reversals in prices and fortunes? This is not aninsignificant matter.Careful analysis is called for.20015010050Oct-83 Oct-86 Oct-89 Oct-92 Oct-95 Oct-98Figure 2.9 Coffee Prices, 1983 2002.Source: Coffee Market Trends Kristina Sorby, World Bank (June 2002).Market Suppl yThe incentive for any business to supply goods to market is to makeprofits to sell his/her product at a higher price than the COSTS OFPRODUCTION involved in offering it for sale.Whether it be a personalservice, such as providing haircuts, the assembly of a luxury motor© 2004 Tony Cleaver car with inputs from all over the world, or selling advertising spaceon-line to invisible consumers, these goods and services will only besupplied if the market price agreed on with the buyer sufficientlyrewards the entrepreneur for his/her efforts.Assume that all suppliers wish to maximise profits.Given thatproduction costs and all other factors affecting the supply of acertain good remain constant, then producers will increase suppliesto the market if prices rise.Conversely, supply will contract if pricefalls.There are many costs involved in offering coffee for sale in agiven market place.At low prices per cup, only the most efficient,low-cost suppliers can afford to produce this beverage and thequantities offered for sale will be limited.If consumers are willingto pay higher prices, however, then other suppliers will be temptedto enter the market and existing producers will also increase theirprovision.At very high prices, businesses which had never previ-ously thought of making this product may well switch productionplans and become coffee suppliers.We can illustrate the relationship between the price of a productand the quantity supplied by the supply curve S in Figure 2.10.Note that, as before, the slope of the supply curve indicates theresponsiveness of producers to alter supplies as price changes.If, forexample, a small increase in price calls forth a proportionally largeincrease in quantity then supply is said to be price-elastic.Therather steep curve shown here illustrates the opposite: relativelylow price-elasticity of supply.Price-elasticity of supply is affected by time the longer busi-nesses have to adjust production plans, the more responsive theySPriceQuantityFigure 2.10 A supply curve.© 2004 Tony Cleaver (a) (b) (c)Price-inelasticPrice-elastic supplyFixedPricesupplysupplyQuantitiesFigure 2.11 Changes in price-elasticity of supply over time.(a) Spot market,(b) the short term and (c) the long term.can be to any market changes.A sudden increase in demand foralmost any product cannot be accommodated instantly, no matterhow high a price a customer is prepared to pay
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