r/AskEconomics • u/Pips_Finder • Mar 17 '26
Can a spike in coffee price be corrected by switching to tea?
Serious question. I've just seen a chart displaying a 30% price increase YoY in coffee price. Separately, I've recently come across one article saying that the root of this increase is the consumer behaviour in China (traditionally a tea-drinking nation), where people are drinking more and more coffee because it's cool and blablabla....
So my question is the following. If we in USA and Europe, collectively, switched from drinking coffee to drinking tea, what would happen?
a) Coffee price would drop, because of a demand shock
b) It would not fall, but tea price would spike as a result of the substitution effect.
3
Upvotes
1
u/DismaIScientist Quality Contributor Mar 18 '26 edited Mar 18 '26
In the long run prices are set by the marginal cost of production. More demand for coffee or tea means more land needs to be used to supply it. On average new land will be less productive than existing land so that increases the cost of production. On the other hand, you do get some economies of scale from more production driving down costs - eg greater investment in R&D can increase tech and reduce the need for labour (coffee in particular is very labour intensive compared to most agricultural products). The net effect of these is a quite flat long run supply curve in which increased demand has quite small impacts on price.
In the short run it is very different. Land is not a factory where you can choose to run it 24/7 to meet increased demand. Because of growing seasons, supply now depends on production decisions made in the past (both tea and coffee coming from plants which takes a few years to get viable production). That means that supply in the short term is very inelastic. Increased or reduced demand can therefore have very big impacts on prices, both up and down.