Sweet treats are going to cost a bit more

The New Zealand Herald reported earlier this week:

Chocolate prices could be set to rise further as the cost of cocoa keeps pressure on...

Chocolate manufacturer Whittaker’s said in a statement that there had been “significant ongoing cost escalation of cocoa” driven by supply constraints.

It said there would be an impact on the future price of all chocolate.

The supply constraints for chocolate are being caused by "aging cocoa trees, diseases, and fluctuating weather patterns", which have reduced cocoa yields. The effects of reduced cocoa yields on the markets for cocoa and chocolate can be easily analysed using the supply and demand model that my ECONS101 class covered a few weeks ago. This is shown in the diagram below. Think about the market for cocoa first. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of cocoa traded of Q0. Poor yields reduce the cocoa harvest, decreasing supply to S1. This increases the equilibrium price of cocoa to P1, and reduces the quantity of cocoa traded to Q1.

Now consider the market for chocolate. The costs of producing chocolate have increased. That leads to a decrease in the supply of chocolate. The diagram for the market for chocolate is the same as that for cocoa, with the equilibrium price increasing, and the quantity of chocolate traded decreasing.

From the consumer's perspective, this means that chocolate is now more expensive. Some consumers will start to look for alternative sweet treats. What will happen in the market for those other sweet treats. That is shown in the diagram below. Since the price of chocolate has increased, other sweet treats are now relatively cheaper than chocolate, so some consumers will switch to other sweet treats. The effect on the market for other sweet treats is shown in the diagram below, where the market is initially in equilibrium with a price of PA, and a quantity of other sweet treats traded of QA. This increases the demand for other sweet treats from DA to DB, increasing the equilibrium price of other sweet treats from PA to PB, and increasing the quantity of other sweet treats traded from QA to QB.

So, it seems that consumers can't avoid higher prices by switching to other sweet treats, because higher price chocolate is likely to lead to higher prices for other sweet treats as well.

Finally, let me address this quote from Brad Olsen from the New Zealand Herald article:

“It might be more difficult for chocolate to increase in price, being a “nice to have” rather than a necessity as households are more careful with their money but chocolate for households is the necessary luxury so willingness to buy chocolate might remain pretty high despite higher prices.”

I guess this is the sort of quote you get from an economist who is caught on the hop by a journalist's question that they were not well prepared for. If chocolate is a luxury good, then ceteris paribus (holding everything else equal), it will tend to have more elastic demand. That means that consumers are more responsive to a change in price than for other goods that are necessities rather than luxuries. Of course, being a luxury is only one of many factors that determine how responsive consumers are to a change in price, and the other factors (like the number of substitute goods for chocolate, and the proportion of income that consumers spend on chocolate) will matter more. Nevertheless, a "necessary luxury" is not something that exists.