Description of the Good and Its Main Characteristics
Coffee is more than just a drink people drink every day. A cup of coffee is essential to getting the day started. It has a huge impact on the international beverage industry, ranking as the second most consumed beverage worldwide after water. Being a highly traded commodity, its supply and demand dynamics are crucial. Caffeine and chlorogenic acid are two of the active ingredients in coffee, which is created through roasting coffee beans (Web MD, 2022). Caffeine has a reputation for revving up the central nervous system (CNS), the muscles, and the heart. Some people think coffee is worthwhile because it helps them stay awake and focused. Chlorogenic acid’s function has ramifications for the cardiovascular system and the ways in which the body regulates metabolism and blood sugar. Coffee consumers often credit it with helping them control their weight, and a number of health problems, including diabetes, dementia, high blood pressure, and cancer (Web MD, 2022). For this reason, the cup of coffee holds a special significance in the hearts of its consumers.
Substitutes and Complements for the Good
There are many substitutes and complements to coffee worth discussing. Substitutes are items that can be used in place of another commodity because they perform the same function (Mankiw, 2020). In this sense, coffee and tea are two examples of substitute commodities. Because of their similar demand profiles, when the price of coffee goes up, the demand for tea goes up as well. When the price of coffee rises above a certain threshold, consumers quickly abandon it in favor of tea, whose price has recently decreased in comparison to that of coffee. The trend causes the demand for coffee and tea to be price elastic across product categories. Complementary products, on the other hand, are those that can be purchased and utilized in conjunction with one another (Mankiw, 2020). A doughnut, for instance, goes great with coffee. If one lowers the price of coffee, more people will drink it, and more people will eat doughnuts if one sells them. There is a shared demand for both coffee and doughnuts. Consequently, the price elasticity of demand for coffee and doughnut is negative.
Whether the Good is a Normal Good or an Inferior Good with Reason
Coffee is a normal good because its demand rises in tandem with rising incomes that are disposable. When income increases or the economy improves, the demand for normal goods also increases (Mankiw, 2020). Regarding that, customers are more likely to buy coffee and spend more money on coffee brands than on substitutes. The surge in coffee consumption in the wake of economic growth can be attributed in part to the high demand in which the beverage is held (Mankiw, 2020). Thus, affluent consumers have a greater demand for prestigious coffee brands.
Main Non-Price Factors that Could Cause an Increase or Decrease in the Demand for the Good
To a greater or lesser extent, demand for coffee drinks may rise or fall for reasons other than price. There may be external forces besides prices that affect demand. This causes a dip in the overall demand curve in the market. Therefore, in addition to price, other factors that could affect coffee demand include consumers’ disposable income, shifts in taste and preference, and the total number of people buying coffee.
Taste and Preference
Coffee consumption is highly sensitive to intangible factors like shifts in consumer tastes. For instance, if a famous person promotes a particular coffee brand, it could lead to a rise in demand for that brand among consumers. Also, if people knew that caffeine was bad for them, they would drink less coffee (Jahani et al., 2018). Some people prefer hot coffee while others prefer cold, and this preference may change as the seasons change. Such reactions from buyers occur because of shifts in consumer taste and preference. The demand for coffee beverages rises as a result of positive change and falls as a result of negative change.
Consumer Income
Consumers’ willingness and ability to spend discretionary on normal products like coffee is proportional to the quantity and type of beverage they wish to purchase. Consumers’ propensity and ability to spend money on coffee is directly proportional to the level of income they have. With more disposable income, consumers have more options when it comes to choosing their preferred coffee brand (Jahani et al., 2018). The demand curve for coffee brands would move to the right as disposable income rose because of the increased demand for these brands. A decline in disposable income would also reduce the need for coffee and related goods.
Number of Consumers in the Market
The laws of supply and demand dictate that there will be greater market demand in the presence of a larger pool of potential buyers. Coffee consumption may decrease if people instead spent their money on tea or other substitutes. There will be a rise in demand for coffee goods if they are introduced to a new market and that market grows as a result of consumer acceptance of the product (Jahani et al., 2018). In addition, the ratio of demand to supply is greatly influenced by population size. The introduction of coffee drinks in highly populated areas implies increased demand for coffee brands. An increase in population results in an increased number of consumers. For instance, during the spring and autumn semesters, a coffee shop near a university will see strong demand and increased sales. Nevertheless, because fewer pupils attend school in the summer, there are fewer potential customers in the vicinity.
How Change in Demand Affects the Equilibrium Price and Quantity of the Good
The equilibrium price is a term used to describe the cost of commodities. There is always a balance between the quantity demand and the amount supplied. Wherever the supply and demand curves meet is where the equilibrium price is set. If demand rises but supply stays constant, the market will set a higher equilibrium price (ReportLinker, 2022). Thus, a rise in demand results in a surplus need to raise the starting cost. Since an increase in price results from an increase in demand, coffee producers are more motivated to sell their product, leading to an increase in output (International Coffee Organization, 2022). As demand drops, the equilibrium price falls and the quantity supplied will decrease. If demand drops, the starting price of coffee supply will rise. Hence, a surplus of commodities would result in a price reduction, which would force producers to manufacture fewer coffee product and this lowers the output.
How Change in Supply Affects the Equilibrium Price and Quantity of the Good
The equilibrium pricing and output may move in opposite ways after a change in the store. An increase in supply has the ability to decrease equilibrium prices and increase the quantity of commodities available. Increases in goods supplied leads to excess supply at the initial cost. Similarly, when there is an overabundance of supply, prices drop and demand increases (Jahani et al., 2018). An increase in the equilibrium price and a commensurate decrease in the equilibrium amount of items supplied result from a reduction in supply. When coffee supplies are low, initial prices rise because of the high demand (Jahani et al., 2018). Prices drastically increase as a result of increased demand, while demand volume declines.
Expectations to Coffee Demand Over the Next Five Years
Based on the prevailing consumer market proportions, coffee demand is expected to rise in the next five years. Between 2023 and 2027, the global coffee market has the potential to increase by $2.36 billion while the demand is expected to increase by 5.85% (ReportLinker, 2022). A shift in consumer taste and preferences is one of the main causes of changes in demand. Moreover, the Covid-19 pandemic’s effects have increased demand for coffee for family use, forcing consumers to concentrate on household coffee drinking. Because to the epidemic, customers are switching to functional drinks like coffee because it is appropriate for hydrating in a healthy way (ReportLinker, 2022). Customers prefer coffee because they believe it has health benefits, which improves health sustainability. Future consumers will favor beverages that ensure health outcomes because they are focusing on eating and drinking healthy foods (ReportLinker, 2022). Also, the expansion of urban populations presents a chance for a change in the demand for coffee. Coffee would have a better position in market demand as a result of a growing population with a strong preference for ready-to-drink varieties.
The demand for coffee will continue to grow as modern populations seek out enhanced beverages and convenient, healthier soft drink alternatives. People prefer e-commerce retail sales, which is a major factor in the increased demand for coffee (ReportLinker, 2022). Other important factors include the improving economy and greater money flow. Agri-tourism is expanding in the coffee industry, and popular trends include coffee parties that need a monthly subscription. Premium coffee shops are also becoming more prevalent. Such initiatives suggest a potential rise in demand for coffee big brands (ReportLinker, 2022). Given that many people like iced and brewed coffee brands, the development of the wealthy class and improved income would induce a change in demand and supply. As a result, coffee will become substantially more valuable and in demand in the future.
Expectations to Coffee Supply Over the Next Five Years
The worldwide supply chain has been disrupted as a result of the Covid-19 pandemic’s impact on output. The fall in global exports has been a blow for coffee producers around the world. The profit margin for exports has also narrowed immensely due to effects of Covid-19. Despite the fact that the global pandemic has hampered the coffee supply chain and reversed early export trends, future coffee supply will rise. The International Coffee Organization (2022) predicts that the pandemic’s recovery procedures will have less of an impact, strengthening the upstream supply and enhancing coffee shipments to diverse locations. Beginning in 2023, the availability of coffee will begin to rise, and the supply chain will remain stable (International Coffee Organization, 2022). Future production will increase since businesses and producers will get back to normal operations.
Furthermore, partners in the supply chain are rapidly resuming supply networks through newly formed distribution channels. Fast supply chain operations are encouraged by close proximity to shipping hubs. Resuming production operations by producers will guarantee sufficient production, enhancing market coffee output (International Coffee Organization, 2022). Higher prices will spur producers to boost their output and provide them the incentive to do so. Most producers will likely return to high output in order to take advantage of the prevailing market conditions.
References
International Coffee Organization. (2022). News. International Coffee Organization – What’s New. Web.
Jahani, H., Abbasi, B., Alavifard, F., & Talluri, S. (2018). Supply chain network redesign with demand and price uncertainty. International Journal of Production Economics, 205, 287-312. Web.
Mankiw, N. G. (2020). Principles of economics. Cengage Learning.
ReportLinker. (2022). The global functional coffee market is expected to grow by $ 2.36 billion during 2022-2026, progressing at a CAGR of 5.85% during the forecast period. Yahoo Finance – Stock Market Live, Quotes, Business & Finance News. Web.
Web MD. (2022). Coffee: Overview, uses, side effects, precautions, interactions, dosing and reviews. WebMD – Better information. Better health. Web.