Read the following news article and answer the following questions: CNN Money: C

Question

Read the following news article and answer the following questions:

CNN Money: Chocolate lovers, beware: prices could go up this summer just like last year!

There's an unsavory forecast for one of chocolate's key ingredients: cocoa. Bad, dry weather conditions are shrinking the cocoa supply, which eventually affects American consumers.

The price of cocoa is up 12% so far this year. That eats into the profits of chocolate makers and forces them to consider hiking prices on chocolate bars, balls, sauce and everything else.

It's deja vu from last year. Cocoa prices were up 13% in the first half of 2014. That -- along with rising milk and nut prices -- prompted Hershey (HSY), Lindt and other chocolate makers to raise their prices about 8% on average last July.

To be clear, no major chocolate brands have announced additional price hikes this year. And you might think, "8% price hike, so what?"

ChocolateMarket

a) Which determinant of supply is mentioned in this article?

b) Has there been an increase or decrease in supply? if there is, please explain in which direction the curve will shift.

c) What will happen to the equilibrium price and equilibrium quantity of chocolates in this market? Explain.

Explanation / Answer

(a)

It has been stated that price of one of the key ingredient of chocolate that is cocoa will rise.

Cocoa is an input used in the production of chocolate.

Thus, price of an input (cocoa) used in production of chocolate will increase.

So,

Price of inputs determinant of supply is mentioned in this article.

(b)

Increase in price of cocoa will increase the cost of producing chocolate. This increase in the cost of producing chocolate will reduce the profit margin of chocolate producers and will compel them to reduce production. This will lead to decrease in supply.

So, there has been a decrease in supply.

When there is decrease in supply then supply curve will shift to the left.

(c)

When supply of a commodity decreases but demand remains same then there is an increase in price amd decrease in quantity.

So,

Given the demand for chocolates, this decrease in supply of chocolates will lead to an increase in equilibrium price and decrease in the equilibrium quantity of chocolates in the market.

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