Equilibration of CoffeeThe Impact of Coffee Rust in Central America

Real World Experience in a Free

Market• According to Agrimoney.com, dated May

21, 2014, coffee growers in Central America will continue to pay a heavy toll for the Coffee Rust (Fungus) plight until 2015.

• Production will fall to a 38-year low. This dire forecast makes no allowance for poor weather stemming from the El Nino weather pattern, which is linked to the drought in many places in America.

• Costa Rica, production is not expected to recover toward any relief, but dropping to 1.38m bags, lowest since 1976-1977.

• El Salvador’s coffee exports for 2013-2014 will fall 74%, a historic low.

The Law of Demand and the Determinants

of Demand• When determinants (ceteris paribus) are

constant, the law of demand is held constant in order to demonstrate the relationship between demand price and quantity demand.

• When the determinants change, they change the positioning of the demand curve.

• If the demand for upscale coffee from Central America is increased due to shortages of coffee beans, the price is going to soar. A demand increase results in an increase equilibrium quantity and an increase in equilibrium price. Starbucks, for one, may ride out the shortages because they have extreme stores of high end coffee, other upscale coffee shops with no surplus may not escape the shortages that are coming.

The Law of Supply and the Determinants

of Supply• Supply determinants, which are resource

prices, production technology, other prices, sellers’ expectations and number of sellers, hold the law of supply constant to demonstrate the relationship between supply price and supply quantity.

• The determinants of adverse weather, drought, and plant disease of the coffee beans of Central America interrupt coffee supplies to America especially.

• With the supply of Central American coffee in shortage, resulting in a decrease in equilibrium quantity and an increase in equilibrium.

Efficient Markets Theory

• Daily consumption of coffee is about 2.5 billion cups, according to author, Geoff Riley. Millions of people across the world depend on its production and sale.

• Eugene Fama (Chicago Booth, 2014) is well-known for organizing the knowledge on efficient markets and for making it precise. His most important contribution to the theory is his 1970 paper "Efficient Capital Markets: A Review of Theory and Empirical Work," which paved the way to numerous academic papers that sought to test the validity of the efficient markets theory.

• The most well-known application of the efficient markets theory can be found in index funds, introduced in the early 1970s. Index funds aim to track the performance of the market by buying a representative cross-section of all of the stocks in the entire market or sector of the market, rather than selecting a few.

Surplus and Shortage• Surplus coffee indicates that the quantity

exceeds the demand for coffee at the price in which the producers would desire to sell—equilibrium level.

• If the current market were competitive, excess supply is equal to the quantity available in the market above the equilibrium point of intersection between supply and demand. This results in a shift in market equilibrium towards lower price points.

• Shortage is a term used to indicate that the supply produced is below that of the quantity being demanded by consumers.

ReferencesCBS This Morning News Videos http://www.cbsnews.com/videos/search?q=coffee%20rust

Agrimoney.com,

http://www.agrimoney.com/news/colombia-coffeee-exports-to-hit-21-year-high--7081.html

AP The Big Story

http://www.bigstory.ap.org/article/ap-newsbreak-brewing-troubles-coffee-fungus

The University of Chicago Booth School of Business

http://www.chicagobooth.edu/ideas/efficientmarket.aspx