Economic Perspectives of Demand and Supply - Essay Example

? MICRO ECONOMICS Tata Coffee, Starbucks Near Deal for Stores …………………………………….. College ……………………………. …………………………………………….. Introduction From the very basic perspectives of Economics, the act of supplying a good or service do not directly result in a demand for it, however if there are customers who demand specific goods or services, there will be someone to supply them. A consumer never demands a good or service simply because a supplier produces them. More specifically, there is no incentive for a consumer to demand a goods or service simply because a producer supplies it, but there is an incentive for a producer to supply a goods or service simply because a consumer demands it. This is the fundamental concept of Supply and Demand Paradox (Fisher, 2007, p. 8). Today’s market is largely influenced by technology advances, globalization and rigorous competition between suppliers and therefore companies are seeking for an effective strategy that can help it stay competitive. Discovering new market and newer opportunity will be far effective way than identifying the existing demands and satisfying consumer wants accordingly. This piece of research paper reviews the literatures regarding factors affecting demand and supply and explain what is price as well as income elasticity in relation to the recent attempt of Starbuck to come in alliance with Tata Coffee. This paper also explains how discovering new market would be a better economic strategy to foster demands from the example of Starbucks’s attempt to deal with Tata Coffee. Economic perspectives of Demand and Supply Demand and supply are perhaps the names of the most important models in all of economics and these two are normally used for providing insights on the movements in price and output. The basic underlying concept of economics assumes that there is a market, where sellers and buyers contact for trade. Sellers are expected to bring goods or services to the market wherefrom consumers are assumed to bring money to it to buy the goods or services they demand (Guell, 2008, p. 20). From the economic point of view, demand is a schedule or curve or any other graphical presentation of the various amounts of a product that consumers are willing and able to purchase at each of the series of possible prices during a specific period of time (McConnell and Brue, 2004, p. 40). Demand is the quantity of a product or service that will be purchased at different possible prices when other things stay unchanged. Quantity demanded shows how much consumers are willing and able to buy the goods or services at a particular price during a specific period of time (Guell, 2008, p. 22). According to the law of demand, price and quantity demanded are inversely related and therefore an individual’s demand schedule will be downwardly sloping in its curve, as depicted in the graph. As price falls, the quantity demanded rises and as price rises, quantity demanded falls. When other market variables are remaining constant, consumers will be tended to buy more of a product as its price declines. Quantity supplied is the maximum quantity that sellers want to sell at a given price. The law of supply states that the quantity supplied will increase when the price rises and will decrease when the price falls, because a supplier will be able to produce and supply more when he expects to gain more profits or other advantages due to price hike (Wessels, 2006, p. 37). As shown in the figure, producers will be producing more of the product or services when price of the same increases in the market. Most of the Economics literatures (Wessels, 2006, McEachern, 2011, Lipsey and Chrystal, 2007 etc) explained that producers are tended to supply more when they expect an extra earning from the price hike or from any other factors that may lead to the same. When it comes to the case of Starbuck’s attempt to work in alliance with Tata Coffee in India, as Ahmed (Oct, 2011) wrote in Wall Street Journal, it can be observed that the effort is purely driven by potential demands and increasing market opportunities of coffee in Indian market. As estimated, the overall Indian consumption of coffee was around 108,000 metric tons in 2010. Rather than looking at the existing market or quantities demanded, it is expected to increase the demands when it can increase the number of retail outlets throughout India. Though supply doesn’t directly cause an increase in demand according to the Economics point of view, this example illustrates that supply can cause demand when there are hidden market opportunities and the producers target the same with effective strategies. India is an opportunity for any emerging business, because as Howard Schultz, the Chairman of Starbucks, said, India could one day rival China and that gives the Starbucks hope of 1500 stores to be launched throughout India and the potential marketing opportunities too (Ahmed, Oct, 2011). Factors Affecting Demand and Supply Generally, there are many different factors that affect demand and supply. Major factors that affect demand include tastes, number of buyers, income, Price of related goods, substitute or complement goods and consumers’ expectations. More specifically, the decision by consumers to buy more of the quantity of a product at each possible price can be caused by: A positive change in consumers’ taste, An increase in the number of buyers, Rising incomes when the product is a normal good, A decrease in the price of complementary good, An increase in the price of substitute good, The consumer’s hope that either price or income will be higher in the future etc (Carbaugh, 2010, p. 33- 34). Similarly, many factors such as price of the resources, technology, taxes and substitutes, prices of other goods, price expectation and number of sellers in the market etc affect the supply. Increase in the price of resources cause decrease in supply, Advancement in technology cause increase in supply, Increase in taxes or decrease in subsidies may cause a decrease in supplies, Decrease in the prices of other goods may increase the supply of other goods as producers may start supplying them, When suppliers expect the price may increase in the future, they may produce more (McConnell and Brue, 2004, p. 40). When it comes to the example of Starbucks’ alliance with Tata coffee with an aim to grab Indian market opportunities, there are different factors that affect the demand and supply. These factors are illustrated below: Factors affecting the demand: Starbucks and Tata Coffee inter-alliance is driven by the increased demand or the hope of rising demand for coffee in India in future. The increase in demand for coffee in India are mainly influenced by the following factors. 1- Changing Consumers’ taste: Consumers’ taste is ever changing. According to the economics theory of marginal utility, the utility that a consumer gets from consuming a particular good or service will be diminishing as he consumes more and more of the same. Similarly, consumers’ interest towards a particular type of good or service will be diminishing and therefore their tastes change. Changing taste is a factor that affects demands. Starbuck looks at consumers’ attitude towards using Coffee. As Ahmed (Oct, 2011) noticed, coffee brands are noticing a growing propensity among India’s middle class. In recent years, large numbers of consumers use coffee instead of tea and coffee has got significance in meetings, conferences and parties etc. Starbuck’s thought to tie up with Tata Coffee has been influenced by the fact that consumers taste in India is changing and they tend to use coffee more increase of tea. 2- Rising Income India is an emerging economy. Large numbers of multinational companies have recently targeted Indian as well as Chinese markets, because of the increased opportunities of business. People’s income is increasing and this can have a positive impact on demand of normal products and services. Factors affecting Supply Starbucks and Tata Coffee inter-alliance to grab newer Indian market opportunities will certainly increase the supply of coffee in India. This is mainly influenced by the hope that they can gain more form the newer marketing opportunities. When demand is increasing or supplier hopes that demand will be increasing in the future, he will be tempted to produce and supply more. Starbuck’s thought to launch around 1,500 stores is thus influenced by the hope of increase in demand for coffee. The major factors that affect supply of Coffee in India are detailed below: 1- Newer market opportunity: When a business perceives an emerging marketing opportunity, he will be focusing on how to grab better from that market opportunity. Almost all the successful companies discover newer market opportunity and design and develop products or services accordingly. For example, Apple Inc has long been focusing on various hardware and software and it has been manufacturing and distributing its products and services through third party sellers. Once it realized the market opportunities, that are until then unnoticed, that it can gain by selling through its own retail outlets, Apple Inc launched more than 100 its own retail stores in around 70 countries and it helped it increase the profitability. Similarly, Starbucks proposes around 1,500 retail outlets to seize the opportunities of coffee market from India. All these outlets will certainly increase the supply of Coffee across the markets in India. Discovering of newer, or hidden market opportunity is therefore one of the most effective marketing strategies. Discovering a newer market opportunity is largely influenced by the competition, technology and other relevant factors. Price Elasticity of Demand As detailed above, the law of demand states that consumers will buy more when the price of a product or service decreases. It means, demand of a product or service will increase when the price declines and decreases when the price increases. The theory of Price Elasticity of Demand explains how much demand increases or decreases when price increases or decreases. Depending on this, the price elasticity will be: Perfectly elastic, if a small change in price causes larger change in demand, Perfectly inelastic, if there is no change in demand even there is greater change in price, Relatively elastic, if there is more than the proportionate change in demand due to the change in price, Relatively inelastic, if there is less than the proportionate change in demand due to the change in price, and Unitary elastic, if the change in demand is similar in proportionate change to the change in price (Baumol and Blinder, 2011, p. 115) Starbuck’s can expect either relatively elastic demand or unitary elastic demand in India, because, there has been 80% increase in coffee consumption in 2010 as compared to a decade back. If the company can offer coffee for relatively less price as compared to that of tea in the general market price and other coffee brands, Starbucks can certainly expect relatively elastic market, and a small decrease in price can have a positive change in the demand. Income Elasticity of Demand Income elasticity of demand measures the degree to which consumers in the market respond to a change in their incomes by buying and consuming more or less of a given product or service (McConnell and Brue, 2004, p. 368). For normal goods, the income elasticity coefficient is generally measured to be positive. When it comes to the case of coffee in India and Starbuck’s future marketing landscape, the income elasticity will be positive and therefore consumers will be buying more of coffee products as the income of Indian consumers grow. As India is an emerging economy and most Indians find coffee rather than an alternative to tea and a standard item in parties and meetings etc, there will be higher demand for coffee in India and the income elasticity will be positive. Conclusion This piece of research paper has reviewed literatures on basic theories of demand, supply, rice and income elasticity of demand and explained these in relation to the example of Starbuck’s inter-alliance with Tata Coffee to open around 1,500 stores throughout India. This paper has highlighted that discovering a newer marketing opportunity is perhaps one of the most effective marketing strategies and this can always foster demands in the market for newer products or services and thus to increase supply as well. 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