Why the supply curve slopes up, extensions and contractions along it, and the conditions of supply that shift it. Through the 2024 cocoa harvest.
Most of the world’s cocoa is grown in Ivory Coast and Ghana. In 2023 and 2024, heavy rain, then drought and plant disease cut their harvests sharply. Cocoa prices roughly tripled during 2024, reaching a record of more than $12,000 a tonne in December. Chocolate makers raised prices and shrank bar sizes.
Nothing happened to demand for chocolate. So what moved?
Sources: ICE New York cocoa futures; International Cocoa Organization, Cocoa Market Report for December 2024.
Supply is the quantity of a good producers are willing and able to sell at each price, over a period of time.
The supply curve slopes up: a higher price means a higher quantity supplied. Why? A higher price makes producing the good more profitable, so existing firms produce more and new firms are drawn in. And producing more usually costs more per extra unit, so firms need a higher price to cover it.
As with demand: a change in the good’s own price moves you along the curve; a change in anything else shifts it (ceteris paribus).
Storms wreck half of this year’s cocoa harvest.
Chocolate makers still want as much cocoa as before.
What happens in the market for cocoa?
Bad weather is a condition of supply: at every price, less cocoa can be offered for sale. The whole supply curve shifts left, and with demand unchanged the price rises. A movement along the curve only happens when the good’s own price changes first.
At £6, firms are willing to supply 8 thousand a week.
The price rises to £8 and firms supply 12 thousand: a movement along the same supply curve, an extension of supply. A fall in price would be a contraction.
Check: The price rises to £8 and firms supply 12 thousand. What is this called?
The good’s own price changed, so we move along the same curve. More is supplied: an extension.
Now new technology cuts the cost of production. At every price, firms will supply more: at £8, 18 thousand instead of 12. The whole curve shifts right, to S2: an increase in supply.
A shift left, to S3, is a decrease in supply: less offered at every price. Think of it as the curve moving up as well: firms now need a higher price for each quantity, because costs are higher.
Check: Which would shift the supply of bread to the left?
Wheat is a raw material for bread. Dearer wheat raises costs, so less is supplied at every price.
Back to cocoa. Bad weather and disease meant less cocoa at every price: supply shifted left, from S1 to S3. With demand unchanged, the price rose. You will see how the new price is found in the next lesson, when supply and demand meet.
Higher costs decrease supply, shifting it to the left (up), not to the right. S2 shows an increase in supply, from lower costs or better technology.
Explain why the supply curve slopes upwards, and what causes it to shift.
The supply curve slopes upwards because a higher price makes producing the good more profitable. Existing firms expand output and new firms are attracted into the market, so the quantity supplied rises: an extension of supply. Producing more also tends to raise the cost of each extra unit, so firms need a higher price to cover it.
The whole supply curve shifts when a condition of supply changes. A rise in costs, such as wages, raw materials or energy, or an indirect tax, reduces supply at every price, shifting the curve to the left. Better technology, lower costs, a subsidy or more firms in the market increase supply, shifting it to the right. For agricultural goods, the weather matters too: poor harvests in 2024 shifted the supply of cocoa sharply to the left.
How far the curve shifts depends on how important the cost is to producers: a rise in energy prices shifts supply much further for energy-intensive goods, such as steel or glass, than for most services.
Cocoa prices: widely reported, 2024. Diagrams drawn with Rough.js and perfect-freehand, both MIT licensed. Your answers are saved only on this device.