Abstract
This paper explores such questions as the determinants of demand and supply for coffee and what factors can lead to a change in equilibrium price and quantity. The availability of substitutes for this good is considered. The price elasticity of demand for coffee and the determinants for it are described. At the end of the paper the way of increasing revenue through a change in price is chosen, whether to increase the price to receive more in payment for each unit, or to decrease price to attract more consumers to switch to buying the good.
Demand and supply are two meanings without that market economies cannot exist. The term demand for a product or service expresses the desire and ability of consumers to buy a certain quantity of goods or services at a certain price within a certain period of time. The law of demand says that the higher price of the product is the lower demand this product will have. The term supply shows the ability and readiness of produces to offer a certain quantity of goods or services at a certain price within a certain period of time. The law of supply states that the higher price of the product tends to the suppliers’ desire to supply the greater quantity of the product.
As for the product to demonstrate the work of demand and supply I am inclined to choose coffee. Coffee is a product with its increasing popularity and consumption in the world, both in importing countries, and in producing countries. Black coffee is one of the world's most popular beverages, its flavor is the most recognizable in the world, and as a consumer product it is the second after oil. Every year mankind drinks 400 billion cups of flavored drink. A cup of coffee in the morning wakes, invigorates and energizes for a whole day.
As for the determinants of demand for coffee, they can be divided into two groups: price and non-price. First of all it is the price of coffee that has reverse connection with demand, reflecting the law of demand. So the higher price causes the lower demand. The other price determinant is the price on the substitute goods such as, for example, tea. Raising prices on tea makes people buy coffee more and vice versa. Non-price determinants include such points as customers’ income: the higher income of buyers turns into the higher demand.
The increasing number of consumers at the coffee market multiplies the demand. Now the consumption of coffee has a tendency to increase yearly. Then tastes and preferences play also a great part. Fashionable goods have increasing demand, unfashionable ones’ demand goes down. Nowadays coffee consumption provided with the development of the coffee culture, and annual increasing of coffee shops (including online stores and coffee) and coffee machines throughout the world becomes more popular. Consumer expectations of price changes and income also influence on demand. If consumers expect a rise of prices or increase their income in the future, they will increase the demand in the current period.
Concerning the determinants of supply of coffee they include such points as production level, coffee stores, currency fluctuation, speculative figures, weather conditions and seasonal peculiarities. So reduction or increasing of prices of factors of coffee production make its supply goes up or down respectively. Currency fluctuation, speculative figures influence on the coffee price that further affects the demand according to the law of supply. Coffee is a product that depends on weather greatly and seasonal peculiarities. For instance, bad harvests in Brazil cause coffee deficit in the world.
Here we meet such term as elasticity of demand that refers to the sensitivity of demand to a change in price. The more sensitive demand is (i.e. the more it changes) to a price change the more elastic it is said to be. From time to time the cold in Brazil causes a great damage to coffee trees, and many of them perish. However, the rise in coffee prices after frosts is usually short-dated. After three or four years, the price returns to the former, before frosts level. Behavior of coffee prices shows that both supply and demand (especially the supply) is more flexible in the long period of time. Note that for a very short period (one to two months after frosts) supply is perfectly inelastic. A fixed number of coffee trees exist, some of them were killed by frost. Demand is also relatively inelastic. As a result, the supply curve shifts to the left, and the price increases dramatically.At the intermediate segment, in a year after the frosts, both supply and demand become more elastic. The supply is more flexible because the remaining trees are harvested more intensively (maybe even at the expense of quality), and the demand is more elastic because consumers have time to change their habits in purchases. In this period a part of consumers that cannot afford to buy coffee at such high prices give their attention to its substitutes such as tea, for example, that can be purchased at much lower prices. It turns into situation when the demand for coffer’s substitute (tea in our case) increases. The supply curve in the intermediate segment is also shifted to the left, but the price starts falling. The quantity of the supply also increases compared to the short-term. In the long-run period the price returns to the previous level, as during this time the planters were able to replace the damaged plants. Thus, long-term supply curve reflects the costs of coffee, including the costs of land, planting and care and a competitive rate of profit.
Being an importer of coffee and interested in increasing revenue through a change in price I will think over all factors that influence the demand and the supply to find a happy medium in price and not to go to extremes. Extra raising the price can lead to losing some part of consumers by applying to the cheaper coffee substitute – tea. A great number of coffee lovers are certain to stay as coffee is somewhat an addiction now. On the other hand, extra lowering the price can increase the demand greatly and cause coffee deficit.
References
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http://www.freeeconhelp.com/2011/09/shifts-in-supply-and-demand-example.html
Demand and supply. (n.d.). In Business case studies. Retrieved from
http://businesscasestudies.co.uk/business-theory/marketing/demand-and-supply.html
