(Solution Download) The price of vanilla beans has been bouncing around a


The price of vanilla beans has been bouncing around a lot. The price was $50 per kilogram (2.2 pounds) in 2000, then rose to $500 in 2003, then dropped to $25 in 2006. We can use the model of demand and supply to explain the bouncing price. Figure shows the changes in the vanilla market in recent years. Point a shows the initial equilibrium in 2000, with a price of $50 per kilogram. The 2000 cyclone that hit Madagascar, the worlds leading vanilla producer, destroyed that year s crop and a large share of the vines that produce vanilla beans. Although the vines were replanted, new plants don t bear usable beans for three to five years, so the supply effects of the cyclone lasted several years. In Figure, the cyclone shifted the supply curve upward and to the left, generating a new equilibrium at point b, with a higher price and a smaller quantity. In Figure the changes between 2003 and 2006 are shown by a shift of the supply curve downward and to the right. In 2006, the vines replanted in Madagascar in 2001 started to produce vanilla beans. In addition, other countries, including India, Papua New Guinea, Uganda, and Costa Rica, entered the vanilla market. The vines planted in these other countries started to produce beans in 2006, so the world supply curve for 2006 lies below and to the right of the original supply curve (in 2000). Given the larger supply of vanilla beans in 2006, the price dropped to about half of its 2000 level, to $25 per kilogram. The increase in supply from other countries was facilitated by the development of a sun tolerant variety of the vanilla plant that allows it to be grown as a plantation crop. The new variety is an example of technologicalprogress.

 







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