Friday, September 30, 2016

An example of contracting costs

TOPICS: Supply and Demand
SUMMARY: The proliferation of small breweries has left owners struggling to find enough specialty hops, contributing to a sudden slowdown in craft beer sales and fueling fears among farmers that they are headed for a supply glut.
CLASSROOM APPLICATION: Students can analyze two points related to economics. First, the supply of beer by small breweries is constrained by the supply of hops they use as inputs. Second, farmers that grow specialized hops for small breweries accept risk that the demand for the hops will not pan out and that the breweries may not survive.
QUESTIONS: 
1. (Advanced) What factor is causing a suboptimal supply of hops used in brewing craft beer?

2. (Introductory) What is the effect of the limited supply of specialized hops on the supply and price of craft beer?

3. (Advanced) Describe the risk that farmers face when growing specialized hops.
Reviewed By: James Dearden, Lehigh University

Questions:
  1. What risk does the hop farmer want to eliminate when signing a contract with a brewer?
  2. What risk does the brewer want to eliminate when signing a contract with a hop farmer?
  3. Can you structure a contract to satisfy both parties? How or why not?

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