Tesco Coffee: Demand, Elasticity and Market Analysis - Economics

This report analyzes the demand and market equilibrium of Tesco's coffee product, examining factors such as price of substitutes and complements, consumer income, tastes, expectations, and demographics. It also explores the price elasticity of demand, focusing on substitution and income effects. The analysis suggests that coffee, being a necessity good, has relatively inelastic demand. This document is a valuable resource for students, and similar solved assignments and past papers are available on Desklib.

Management Economics
Assessment 1

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
1. Describing the business and its main product and service.......................................................3
2. Identifying demand and market equilibrium on the different factors......................................4
3. Factors influencing the Price Elasticity of Demand................................................................5
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management economics is defined as the branch of the economics which involves the
application of the different economics methods. The project is based on the Tesco company
which the British multinational company. This report will outline the chosen product of the
company and why this product has chosen. This project provides critical evaluation of data for
guiding the policy into an international, national and organizational context. It will provide an
application of different economical concepts for influencing the decision of organization.
Analysation will be done of impacts from government policy on the marketers which will affect
the managerial decision.
MAIN BODY
1. Describing the business and its main product and service
Tesco Plc is the British Multinational retail grocery store having its headquarter in
Welwyn Garden City in England. It is the third largest retailer in the world by measuring the
gross revenues. It has its shops in the different five countries across Europe and it is the market
leader in the UK in the groceries. The market share of the company is around 28.4%. The
organization deals in the variety of products and its main products are bananas, corned beef,
fresh beef, berries, chicken and eggs, citrus fruits, coffee, cocoa, cotton, milk palm oil, etc. The
organization has expanded its business and used to sell more than 270 products in their grocery
store. It was founded in 1919 by Jack Cohen by having the market stalls in Hackney, London.
The company has diversified its business into different areas like clothing, retailing of books,
electronics, toys, petrol, financial services, etc.
The product of the company for doing the project is coffee as this product is the most
consumable product for the people. This product is one of the best and traded product around the
UK. The largest volume of the coffee for the organization comes from the Vietnam which is
followed by Brazil. The company is certified in order to sell the best coffee in the market and
makes it to develop in the sustainable market.
This product is chosen because this product comes in the necessity of the goods. As some
people are addicted to have coffee so this will maintain the demand of the products in the market
(Tirawatnapong and Fernando, 2018). This product has also sold at the time of the pandemic
because it comes in the basic necessity goods. This will maintain the demand of the coffee and
by this the company will be earning good profits as it is the leading grocery store.

2. Identifying demand and market equilibrium on the different factors
Demand is defined as the desire of the customers in order to purchase the goods and
services at the given price. This can be of two types that is demand in the market for specific
goods or aggregate demand that means demand for the total goods in the economy.
Market equilibrium is the stage in which the market demand and market supply is at the
same point that is equilibrium point (Acay, Bas and Abdeljawad, 2020). Equilibrium point means
when the supply is exactly gone according to the demand in the market. The organization must
have the equilibrium point in order to maintain the profitability and productivity in the market
(Dzhabarova and et.al., 2020).
Price of substitutes: Substitutes are the products which can be used if the real products is
not available or its expensive. The prices of the substitutes goods shifts the demand curve of the
company (Edalatpour and Al-e-Hashem, 2019). The best substitutes of the coffee is tea. People
can have tea instead of getting coffee or if the prices of coffee increases the customers may shift
to the tea. The increase in price of the substitutes will increase the demand of the coffee and vice
versa. There is no such gap of prices in the substitutes products. The prices of the substitute that
is tea is not increasing hence it does not affect the demand of the coffee in the grocery store
(Gupta, Ivanov and Choi, 2021). The organization must maintain the quality of the product so it
makes the customers to have their product only. This makes the organization to keep safe its
products which may get affected by the prices of the substitutes.
Price of complements: The complementary goods are the products that adds the value in
the main product. The prices of the complementary goods may affect the demand curve of the
product as the products will not be able to consume without availability of the complements
(Maas and et.al., 2020). The best complement of the coffee is milk. As many people used to
prefer to have the milk and coffee together. In the pandemic there is rise in the prices of the milk
but it is the necessity god people have to buy this in order to fulfil there basic needs. The price of
the complement that is milk is increased but it will not affect the demand of the product as it is
the necessity goods. The milk is the perfect complement of the coffee as it is consumed with one
another. There is inverse relationship between the demand and supply of the complements. The
increase in price of the complement will decrease the price of the product.
Consumer Income: Consumer income refers to the income that the person earns either
from doing work or by doing investments. When the income of the consumer increases it will

increase the demand of the products in the market (Cranfield, 2020). If the nominal income
increases and the prices of the goods are same than the consumer will buy more product and thus
it will increase the demand of the product. The consumers of the UK has increase in the income
so it will increase the demand and supply of the chosen product.
Consumer tastes and preferences: The consumers taste and preferences are defined as
the individuals tastes which is measured by selling of the major bundles of goods in the market.
There are some factors which influence the taste and preferences of the customers that are habits,
quality of the foods, availability of the product and the availability of information and
knowledge. The change in taste and preference of the consumer may slightly affect the demand
of the product, as coffee is the necessity good consumer will not change its preferences. They
may change the type of the product but will not stop consuming that product. The change in taste
and preferences of the customers will slightly affect the demand of the chosen product.
Consumer expectations of price: Price expectations are basically the expectations of the
consumer in order to have the purchase decision of the particular product. Consumer
expectations related to price includes the quality and quantity of the product according to the
prices. After the happening of the pandemic there may be risen in the prices of the products. The
consumer are nor expecting in order to increase in the price of the product because it is the
necessity good and will be purchased by them. If there is high change in the price of the coffee
there is been slightly decreased in the demand of the coffee.
Demographics: The number of buyers are the total number of person who used to buy
that product from the grocery store. If there is increase in the number of buyers in the
competitive market the demand of the good increases and vice versa (Basso and Rachedi, 2021).
This will makes the demand curve shifts to right. There are many buyers in the market who used
to buy the coffee because this product is the essential commodity for the buyers. There are many
customers which are addicted to the coffee which maintain or increases the demand of the
product. The increase in number of buyers will increase the demand of the coffee in the
organization.
3. Factors influencing the Price Elasticity of Demand
The price elasticity of the demand is referred as the measurement related to the change in
consumption of the goods with the change in the prices of the product. This term is used by the
economist in order to measure and understand that how the supply and demand gets affected

with the changes in price. Prices of the some goods are very inelastic this means there is no
change in the supply and demand of the product with the increase or decrease in the prices. The
demand and supply of the necessity goods also not change with the changes in the prices of the
products. Price elasticity of demand can also be referred as changes in demand of the product in
response to the changes in the prices of the product. The factor which influence the Price
elasticity of the chosen product of the Tesco are as follows:
Substitution effects: The substitution effect refers to system when there is decrease in
sales for the particular products as the consumer is shifting to the other alternatives when its
price rises. If the prices of the goods rises than the consumer will choose the best alternative of
that product in order to have or consume that product (Sun and et.al., 2019). Necessity goods will
always be purchased by the customers even when there is increase in the prices whereas in the
luxury goods consumers reduces the quantity or stop buying that product if there is increase or
changes in the prices. The price elasticity demand depends on the types of good that the
consumer has to buy. This happens when the prices of the products and services rises but the
income of the consumer remain same (Substitution Effect, 2021). As the chosen product is coffee
and coffee comes under the necessity goods the consumer will buy that product even when there
is increase in the prices of the chosen product. The price elasticity demand of the necessity goods
have inelastic demand as demand of the product will not affect the supply of the goods. The price
elasticity demand of the luxurious goods are elastic as consumer will not buy that product it the
price increases. This factor indicates that the demand of the chosen product that is coffee for the
consumer is more inelastic as coffee is the necessity goods from the consumers point of view so
consumer will not stop buying even if the prices increases.
Income effects: The income effect refers to the system in which the consumer changes
the consumption of the goods and services according to change in the income. If the income of
the consumer increases it will shift to the using branded or luxurious products whereas if the
income decreases the consumer will only buy the basic and essential goods (Elbakidze and
Nayga, 2018). There is negative income effect on the consumer that is the scenario when the
demand of the product falls even if there is increase in the income of the consumer. It basically
happens when the consumer does have the need and utility of that product even when the income
increases. The price elasticity of demand depends upon the proportion of income of the
consumers spent on the particular product. The greater income spent on the commodity the

demand of that product is more elastic and less portion of income spent has inelastic demand. As
the chosen product is coffee which does not spent the large portion of the income of the
consumers so it has more inelastic demand. It shows that the consumer will buy the coffee even
if their no increase or decrease in the prices. It is also noted that the if the price of the commodity
rises the customer may switch to the similar product which may affect the demand of the product
in the market. As there is less and some portion of income is spent by the consumers on the
coffee they may the customers not switch to the substitutes available in the market.
Analysis on the pricing policy adopted by the organization
Price is the important factor in the marketing mix as it decides the profits of the company.
It is the important marketing mix which affects the income of the business organization. The
slight changes in the prices can completely changes the profitability of the company. It is
basically known as the medium of exchange of goods and services. The organization must have
the good pricing policy which makes to have the systematic approach to the decision of the
prices of the product in order to sell that product. The pricing policies should be chosen by the
organization with focusing on the various competitive situations in the market (Penetration
Pricing, 2021). The pricing policy adopted by the Tesco should be penetration pricing strategy.
This pricing policy strategy is basically used by the marketers in order to gain the market share
by having low prices in the starting for targeting the customers to purchase the products of the
company. By doing this it makes the customers to attract towards the products of the company
and makes the customers away from its competitors. The pricing policy should consider the cost
of the product and then company set the profit on that product. There are various factors which
may influence the pricing of the product that are cost of the product, demand and utility,
competition in the market, government regulations, marketing methods, etc. There are various
benefits to the organization by using the Penetration pricing strategy that are as follows:
High adoption and diffusion: This pricing policy helps the organization to gets its
products quickly adopted and accepted by the consumers in the market. It makes the company to
maintain its profitability in the competitive market.
Dominance at marketplace: As the organization is leading in the grocery market across
the UK so it must have the dominance at the marketplace. By having the dominance it can
compete with its competitors and attracts the more customers.

Economies of scale: By having penetration pricing policy it makes the organization to
generate the high sales quantity and makes the organization to have economies of scale. By this
the marginal cost of each additional product decreases at products is done at bulk with increasing
demand.
Increases Goodwill: By targeting more customers and increasing in demand and supply
of the products it increases the goodwill of the organization. By having the good and nominal
prices the customer will return to the firm again in order to buy the goods.

The above graphs shows the annual turnover of the Tesco, which is simplying that the revenue of
the company is increasing in every year which is the good for company to survive in the
competitive market.
Illustration 1: Annual revenue of Tesco

The above graphic shows the number of stores that the company has in different states. First it
shows the stores are increasing at but after happening of the pandemic the stores are decreases in
many countries.
Illustration 2: Tesco's number of stores

This graph shows the quality demand of substitute goods and the other graph shows the quality
demand of the complementary.

CONCLUSION
From the above report it is evaluated the product of the Tesco company that is coffee. It
is chosen because it is the basic necessity good of the grocery store which will not affect the
demand and supply in the market. Further this report describes the demand and market
equilibrium on the factor that are influencing the demand of the coffee that are prices of
substitutes, prices of complements, consumer income, consumer taste and preferences, consumer
expectations of prices and demographics. At last this report has described the price elasticity of
demand on the factors which are substitution effects and income effects indicating demand is
more elastic or more inelastic and the penetration pricing policy that is used by the business
organization.