Question

Brewed coffee is one of the most popular drinks in the world and a big market in Singapore. In recent years Singaporean consumers have become concerned that coffee farmers often receive very low prices by large coffee companies buying their beans and selling them in international markets. For this reason, fair trade coffee has reached supermarket shelves and coffee shops. Because producing fair trade coffee includes providing extra income for the farmers, this product is more costly to make than other coffee types of comparable quality. Using the demand-supply model, analyse this change in consumer preferences. Examine the likely consequences in one or two markets of your choice

Answer 1

When the cost of producing coffee powder is high by the farmers, the price of fair trade coffee will be high. Since coffee is a normal good which follows the law of demand, when there is an increase in the price of fair trade coffee, the amount of commodities sold will be less. As a rational consumer who wants to maximise his utility, the typical response to an increase price level would be he chooses a less expensive product over the expensive ones.

In the law of demand we assume that all the other factors are constant like taste and preference, trend etc. Since here the question metions that the consumers are concerned about the coffee, their taste and preference has changed. When the taste and preference is increased for fair trade coffee , the demand for the coffee increases. This is shown in the diagram below.

When the taste and preference increases, the demand for fair trade coffee increases, in that case when the price increases, the quantity increases as well. Consumers will prefer more of the commodity

Another two examples of the same scenario would be

1. when your favorite celebrity endroses a clothing product, this may increase the demand for the product even though the price is comparatively high

2. Another example would be, the demand for umbrellas would be high during rainy season, despite the price being high.

Both of these are due to the changes in taste and prefernces