Question

While sipping a cup of coffee, CEO William Corke began to reminisce. It seemed like yesterday, but it was actually more than 10 years ago when he had convinced the board of directors of National Foods, Inc., to go into the soft drink business. Here he was a decade later, sampling a product that his VP of Marketing, Samantha Gordon, was telling him would be an even stronger “growth engine” for the company than bottled water. She had pointed out to him that in 2003 Caribbean consumers spent $1 billion on coffee. Although this amount was far less than the $3 billion spent annually for tea, it was five times as much as people spent on coffee a decade ago. “It’s obvious,” she told him, “National Foods must get into the coffee business.” As he poured his second cup of coffee, Bob had to admit that even he had begun to prefer coffee over tea. He decided to call Samantha into his office to discuss the matter further. “Okay, Samantha,” Bob began, “You’ve always had a good instinct for what’s new in the market. But before we leap into this, I want a report on exactly why you believe coffee will be the real spark to our company’s growth in the coming 5 years. After all, in our business it’s all about ‘share of stomach.’ If people are drinking more coffee, then they might be drinking fewer soft drinks and bottled water, so we’d be cannibalizing our own products. I’d feel much better if you could help me understand why this wouldn’t be the case. Furthermore, what are the key determinants of the demand for coffee? Could this be just a fad? Already people are starting to tire of their low-carb diets.

1. Based on the scenario, prepare a response to the CEO describing how five key demand determinants that could affect the demand for coffee.

2. Based on your response to question 1 above, write the expression for the following for coffee:

a. Demand function ( 5 marks)

b. Demand curve

3. How might people respond to changes in the price of competing products such as bottled water and carbonated soft drinks? d. Explain the factors that would determine if coffee is a ‘luxury’ good, or a necessity.

Answer 1

1. Business is the dependent of supply and demand. Demand is a driver of economic growth and business always want to work on increasing demand while working on achieving profitability. Considering the current scenario CEO’s prospective to increase demand for Coffee business is based on five key principles which determine demand. The five key determinants of demand are as follows-

1. The Price of commodity and service.

2. The income of the buyer or buying capacity.

3. The prices of the related goods and services basically the substitutes and alternatives.

4. Preferences of the customers the buyers of commodity and services.

5. Buyers expectation- the thinking of the buyer on increase or decrease in pricing of the product and services he tends to buy.

The equation of demand function

qD= f (price, income, prices of related goods, tastes, expectation)

Hence the equation explains the relationship of demand with its functions, So the quantity of Coffee demanded will be function of five factors- Price, Income, prices of related goods to coffee, preferences of customers and the supply impact on the price of the product (Coffee). As these factors might change hence there will be change in demand of Coffee.

2. Demand Function Determinants for Coffee-

As per economists the impact of factors which determine Demand are unique. So when the income of the buyer will change, suppose increases- that could increase demand, hence buyer has more money to enjoy the new coffee taste and hence can buy more thus increasing demand for coffee. But when other factors increase like the price of the related goods or the substitute of coffee the demand will decrease.

However, we need to remember that all the factors of demand do not change at the same time. So while determining the increase in demand for Coffee we need to maintain a hypothecated figure for all other determinants do not change.

Income- When the income rises the demand increases, and when income decreases so it will impact the demand to decrease.

Price- As per the law of demand when the price rises the demand falls. This means when the price falls the demand rises.

The Price of Related Goods and Services- The prices of the related services and goods will impact the price of the Coffee in the market. The opposite reaction will happen if price of the substitutes will increase.

Tastes and Expectations- Hence last but not least, the change in tastes for a particular product will impact the demand in the market so if people like the Coffee of company X this will increase the demand but if the tastes change happens due to new things in market the demand for coffee will go down. When people expect that the value of something will rise, the demand will increase.

Demand Curve

The demand curve shows the relationship between quantity of product demanded by a market and the price the market is willing to pay. It is a visual representation of number of units of a good or service will be bought at each possible price.

the price is on the vertical (y) axis, and the quantity is on the horizontal (x) axis. This chart plots the conventional relationship between price and quantity. The lower the price, the higher the quantity demanded. As the price decreases from p0 to p1, the quantity increases from q0 to q1.

This relationship follows the law of Demand, which states that the quantity demanded will drop as the price rises, all other things being equal. The relationship between quantity and price will follow the demand curve if the Determinants of Demand do not change.