Sugar prices on the up – Supply and demand, PED and PES

This article on raw sugar is pure gold! It could be used for lessons on demand and supply, PED or PES.

Supply and Demand

The price of raw sugar peaked at 24.85 cents last month, its highest since 1981. The increase in price has been caused by a large proportion of Brazilian sugarcane being diverted from food use into ethanol production. At the same time, the biggest consumer of sugar, India, has had a dismal monsoon season and has gone from being a net exporter of sugar to an importer. These two factors have caused supply to drastically reduce, increasing the price of raw sugar.

Price elasticity of supply

One of the key factors that affects the price elasticity of supply of a good is the availability of stockpiles. In this case, even though consumption of sugar is predicted to outstrip production by 9m tonnes next year, governments and food companies have stockpiles that could be dipped into. Therefore supply should be more elastic than you would expect of a good that takes a long time to produce.

Price elasticity of demand

Any sugar lovers out there should not panic as in Europe and the US sugar prices are fixed to protect sugar beet farmers.

In addition, even if prices were not fixed, demand is unlikely to change for sugar as it is a small proportion of a person’s income. Even if the price were to increase substantially, people are still likely to buy it. Click read more for some questions to go with this topic.

1. Define price elasticity of supply (2)
2. Draw a supply and demand diagram to show the effect of a dismal monsoon season in India, on the price of raw sugar. (4)
3. Demand for sugar is likely to be price elastic, do you agree? Give reasons for your answer. (6)