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Now It’s Chocolate

Mar 15, 2011 • Demand, Supply, and Markets, Developing Economies, International Trade and Finance • 104 Views    No Comments

According to one recent news article, a Cadbury chocolate bar is missing 2 chunks but the price is the same.

First we had a hedge fund trying to corner the cocoa bean market. Then came political turmoil in the world’s leading cocoa producer, the Ivory Coast. The result was the price of cocoa beans touching a 32-year high. Combine that with the rising price of sugar and you get either a smaller chocolate bar or one that is more expensive.

With chocolate added to our list of soaring commodity prices, we can see that on the supply side, the reasons for soaring prices have varied. But, on the demand side, the response has been similar.

The Economic Lesson

For certain items, we buy much less when price rises and much more when it falls. At other times, our quantity demanded remains relatively stable, no matter where price goes.

How we respond to a price change is called our price elasticity of demand. More technically, demand elasticity compares the proportional change in quantity demanded to the proportional change in price. We tend to display much greater demand elasticity for luxury goods than for necessities.

Is chocolate a necessity?

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