Supply — practice question

Vanilla is an input in making soft drinks, cakes and perfumes. Even so, its chief application is in ice cream production. Fig. 1 displays the varied costs involved in producing ice cream for one firm. Madagascar is the world’s biggest supplier of vanilla, with Mexico and Tahiti next. At the beginning of 2016, economists anticipated that ice cream prices would rise because the price of vanilla had increased by 130% in 2015. This was mainly the result of poor harvests in Madagascar, which lowered vanilla output in 2015. In most countries, ice cream is regarded as a luxury item. It has many substitutes, and this is one reason producers do not always fully pass higher costs on to customers. In 2015, several other changes also affected ice cream production, including an increase in worker productivity. Besides vanilla, Madagascar produces various other primary products, including coffee and sugar. Nearly 80% of the country’s labour force works in the primary sector. The country has a relatively low Gross Domestic Product (GDP) per head and a relatively low Human Development Index (HDI) value, as shown in Table 1. This restricts the amount people in Madagascar are able to save. Half of Madagascar’s population lives in poverty. The government is attempting to cut poverty by introducing a programme of cash benefits. It is hoped that one outcome will be higher school enrolment and attendance among children from poor families. To raise economic growth, the government has sold several state-owned enterprises and is shifting the economy towards a market system.