Guillaume's Econ Blog

Welcome!

This Blog will be kept up to date monthly and will contain regular article reviews, analysis, and more.

In the new economy, information, education, and motivation are everything.
- Bill Clinton

New
[3/02/09] New commentary added! Chocolate is a comfort food, after all!

Features:
Get the headlines right here on the blog! Wall Street Journal cover page on the right

On the right side of this page, there will be a monthly poll regarding current events - please contribute with your opinions!
CURRENT POLL TOPIC: Market Failures

Also on the right side of this page, you can find a stock portfolio. Just click "edit" and "add" to have a quick snapshot of the market!

Bad Economy = good business for chocolate makers in India

In the article, a shift in the domestic food habits of the Indian consumer is leading to an increase in demand in the chocolate market of India, a well established area of cocoa production. Due to this increased popularity of chocolate consumption, the country’s cocoa imports are being increased. Because a new profitable market has been found, domestic production will be increased by 63 percent, 10,000 to 16,000 tonnes. In comparison, India’s annual cocoa demand is estimated to be 18,000 tonnes; 2,000 tonnes will be imported. The increase is demand is due to the increased prosperity of the population in the region.
Overall demand of chocolate and therefore cocoa has increased. The supply and demand curves for the chocolate market are shown below; one before the increased demand and another portraying the increase itself.

The increase in demand signifies an increased desire for chocolate, and this shifts the demand curve to the right. The supply and demand curves now meet at the new equilibrium point B, ensuing in both higher prices and quantities for chocolate; P1 has moved to P2, and Q1 has now increased to Q2. To meet this increased demand, the country plans to increase domestic cocoa production. This increase in supply, however, may not occur in the short-term. This is because in the short-term, a firm can only configure its variable resources i.e. labor. To significantly increase cocoa production, the firm must plan long-term expansions which will increase capital such as cocoa bean machinery and land i.e. larger cocoa plantations - the supply curve will shift to the right.

The increase in supply responding to the increased demand for chocolate has caused the equilibrium point to shift down to the right from B to C. Resulting is a further increase in quantity from Q2 to Q3, and a lowered the price from P2 back to P3, the same previous price as P1. Therefore, ceteris paribus, by responding to the increase in demand, suppliers have been able to produce more for the same price as before which benefits the consumer. This is a necessary economic decision for India; according to Cadbury India, cocoa requirement is growing about 15 percent annually, and may grow to an average of 30,000 tonnes in 5 years. If demand kept increasing and no increases of supply were made, costs would rise and there would be an eventual shortage of chocolate.

The article states, “the market is still in its early stages”; there is much room for expansion and improvement. As long-term expansions are made and new suppliers enter the market, technological improvements could follow. Technology is a determinant of supply; the introduction of new, efficient machinery in Indian cocoa plantations could indicate a further increase of supply and a shift of the curve to the right.

Chocolate is considered a normal good in countries where chocolate consumption is regular; it is more of a luxury in a country which is less prosperous, such as India. The article clearly states that chocolate is considered a luxury good, “Chocolate consumption is gaining popularity in the country due to increasing prosperity”. If chocolate consumption is increasing due to increased wealth of the population, we can deduce that the Indian people see chocolate as a good that is only obtainable with higher incomes. This would also mean that chocolate is an elastic good. Elasticity is the measure of the responsiveness of consumers or producers to a change in price of a good, related good, or income. If demand for chocolate is elastic, it is a good which will have an increased demand if consumer’ incomes increase.

Perhaps chocolate consumption can indicate the financial stability of an economy, much like GDP can. Deciding which indicator is more precise, however, can be difficult. GDP is a very macro view on the economy of a nation, taking total production into consideration. Chocolate consumption, on the other hand, focuses on the financial stability of every citizen (consumer) in a nation’s economy. Furthermore, chocolate consumption only displays interesting results in emerging and transforming economies such as India, whilst GDP gives a more dependable outline of every nation regardless of it’s economic situation; chocolate demand is known to increase during economic difficulties.

[Analysis] Increase in Demand, Shortage of Coal

Definition of Terms
$/mt - USD (United States Dollars) per metric Tonne (1000 kg) of coal.
Economic Growth - Monetary Indicator of overall increase of national income measured by salaries, value of all outputs, and expenditures (debits, payments)
Depletion - serious or complete exhaustion of supply of a good, which is usually scarce.

Platts.com - June 22, 2008
"Coking coal prices top $350/mt as steel demand, supply uncertainty hits market"
According to Platt's annual coke coal price assessments, all variants of coke coal have increased in price primarily due to continued tightness in the metallurgical coal market.
In fact, the average increase in price is $30/mt.
Apparently, the increase also has links to the increased demand of steel bars and sheets for use in construction, consumer appliances and automobiles in regions experiencing economic growth such as Asia, Eastern Europe, and Latin America.
The mining and infrastructure constraints are limiting future export growth for the US, which already has higher average production costs than Queensland, Australia - its main competitor.
It is very possible that this bottleneck of coke coal will only get tighter as time goes on, due to the market economy's depletion of scarce resources.

Coking coal is the primary ingredient in a blast furnace to create steel. Currently, world wide steel production sets a record at approximately 119.5 million mt, or 119,500,000,000 kilograms. Without a doubt, this requires enormous amounts of coking coal; production of one mt of steel requires 630 kg of coal. This indicates a strong demand for the coal at any price. To maintain a profit margin, steelmakers have successfully raised product prices to contend with the surge of iron ore and coal costs. Despite the fact that the steel market's "excellent condition" eases the way for raw materials, these raw materials are facing depletion and, as stated before, surging prices are making the cost of production for steelmakers unbearably high. As production and resource costs rise, suppliers are forced to make a change in supply.

A rise in the price of resources in the steel making firm means that the firm must now supply fewer metric tonnes of coal at all prices, causing the supply curve to shift from the right to the left. This is a decrease in supply (see graph).

A subsequent fall in the cost of resources for production will allow the firm to increase their supply once again, shifting the supply curve back to the right.

As an alternative, and a possible combat against the rising prices, steel makers have found a partial substitute for the low-volatile hard coking coal. A new, lucrative semi-soft coking coal has higher amounts of volatile matter however yields less steel, which explains it's lower price: hard coal has an increase in price of $10/mt, and the innovative semi-soft coal had only a $2.5/mt increase.


As in these two graphs, a decrease in supply is visible for hard coal, because the new semi-soft coal has lower production prices. Suppliers always want to supply and produce what will produce the largest marginal profit. As a result, in the second of the two graphs, the supplier will increase the quantity supplied from Q to Q1, ergo raising the market price from P to P1.

The increase in price for both substitute goods can be tied to demand from steel makers to find an alternative to pricey and scarce hard coal. At the moment it is highly priced and can not be produced in high volumes. Furthermore the new, lucrative semi-soft coal does not yield the same steel output as hard coal, although at lower prices. The suppliers of coking coal are always working towards their goal to supply enough coal at lower prices to the demands of the World's industry.

[Article] Demand for use of Public Transport System in Belgium Falls

Het Nieuwsblad - September 23, 2008
In this article, "Het Nieuwsblad" explains the results of a survey taken in 2008 of the amount of people satisfied and planning to continue using the Rail system "The Line" in comparison to the survey of 2006. In 2006, 81% of the population of Northern Belgium preferred the public train over cars, however in 2008 that percentage dropped to an average of 77%. Although small, this change in percentage is believed to be caused by the lack of punctuality on the routes that are taken by the trains, which has been becoming worse over the years, causing car travel to become more desirable. This confirmed the belief of the General Director of "The Line" that unless investments are made, the demand for use of Public Transport will continue to fall.
This increased desire to use cars in travel can have other adverse effects on the economy:

• Increased demand for oil
• Increased demand for cars
• And, because Trains are no longer desired, even an increased demand for Bicycles

These are all complementary goods.