Micro Economics - Tea - Group 2.pdf

8/14/2019 Micro Economics - Tea - Group 2.pdf

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Group 2 | Abhinav Vyas 13P182, Aditi Rathi 13P187, Archit Arora

13P198, Rajesh Nair 13P227, Sudeep Khare 13P211, Sahil Vij 13P233

MICRO

ECONOMICS

Estimation of Demand Function for

ProductTEA in India


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Table of Contents

INTRODUCTION ............................................................................................................................................. 3

DEMAND FUNCTION ..................................................................................................................................... 4

GLOBAL STATISTICS ....................................................................................................................................... 5

INPUT DATA for REGRESSION ANALYSIS ....................................................................................................... 6

REGRESSION ANALYSIS 1st Iteration .............................................................................................................. 9

REGRESSION ANALYSIS 2nd

Iteration ........................................................................................................... 11

ANALYSIS of the estimated DEMAND EQUATION ....................................................................................... 13

References .................................................................................................................................................. 15


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INTRODUCTION

Tea is an aromatic beverage commonly prepared by pouring hot or boiling water over cured leaves of

the tea plant, Camellia sinensis. Tea is globally one of the most popular and lowest cost beverages, next

only to water. Tea was first introduced into India by the British, in an attempt to break the Chinesemonopoly on tea. The British brought in Chinese seeds to Northeast India but the plants failed, they

later discovered that a variety of tea was endemic to Assam and Northeast region of India and used by

local tribes. Using the Chinese planting and cultivating techniques, British launched a tea industry by

offering land in Assam to any European who agreed to cultivate tea for export." Tea was originally only

consumed by anglicized Indians, it was not until the 1950s that tea grew widely popular in India through

a successful advertising campaign by the India Tea Board.

Tea is indigenous to India and is an area where the country can take a lot of pride. This is mainly because

of its preeminence as a foreign exchange earner and its contributions to the countrys GNP. In all

aspects of tea production, consumption and export, India has emerged to be the world leader, mainlybecause it accounts for 31% of global production. It is perhaps the only industry where India has

retained its leadership over the last 150 years.

India is the world's largest tea-drinking nation, although the per capita consumption of tea remains a

modest 750 grams per person every year.

Tea Industry is an agro-based labor intensive industry, providing direct employment to over a million

persons, and another 10 million persons derive their livelihood though various forward and backward

linkages. Women constitute 51% of the workforce, making the tea industry one of the largest employers

of women among the organized sectors of India.

PRODUCTION IN INDIA


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DEMAND FUNCTION

We derive the consumption function for tea by resorting to a standard utility maximisation exercise for a

typical consumer who consumes n goods. The first order conditions obtained from such an exercise can

be solved to get a system of nMarshallian demand equations in terms of income and prices as follows.

pMcc ii ,

* In microeconomics, a consumer's Marshallian demand function specifies what the consumer would

buy in each price and wealth situation, assuming it perfectly solves the utility maximization problem.

Assuming that individual consumption for a particular good can be summed over the entire population

(let us say population size is m) to get the aggregate consumption for that good, we can write the

aggregate consumption of tea as

m

j

j pMcC1

,

where M is domestic per capita income and p refers to a vector of prices which can include the own

price of tea, price of its substitutes and price of its complements. We took coffee as a substitute

commodity, and milk and sugar as the two complements of tea. Further, to observe the impact of tastes

and preferences of consumers on consumption of tea, we include a trend variable in the consumption

function. Thedemand model for tea is thus given by

287652413210

SPTFIMCTrendMPPPPC CCso

where oP is own price of tea, sP is the price of substitutes of tea, 1CP is the price of sugar, 2CP is the

price of milk and Trendis the trend variable, which takes a value of 1 for 1994-95, 2 for 1995-96 and so

on. IMC and SPTF are Policy Changes in the Indian Tea industry for the year 2003 and 2006 respectively.

Consumption of tea is negatively related to its own price and the price of its complements, and

positively related to price of its substitutes and income. The impact of the trend variable is an empirical

issue, depending upon whether the changing tastes and preferences of consumers have had a positive

or negative impact on consumption of tea.


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GLOBAL STATISTICS

GLOBAL STATISTICS

WORLD PRODUCTION ( in M.KGs )

WORLD DEMAND AND SUPPLY FOR TEA ( in M.KGs )

TEA PRICES


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INPUT DATA for REGRESSION ANALYSIS

Consumption of Tea Tea Prices

Estimates of (Internal) Consumption and Per CapitaConsumption of Tea in India Tea Prices

Year

Domestic

Consumption (in

M.Kgs)

Per Capita

Consumption

(Grammes Per

Head) Year Avg. Tea Price per Kg

1994 550 608 1994 38.18

1995 562 610 1995 47.99

1996 580 617 1996 47.73

1997 597 625 1997 65.47

1998 615 633 1998 76.431999 633 642 1999 72.79

2000 653 652 2000 61.71

2001 673 654 2001 61.66

2002 693 663 2002 55.96

2003 714 672 2003 56.03

2004 735 681 2004 64.54

2005 757 691 2005 58.05

2006 771 693 2006 66.01

2007 786 696 2007 67.27

2008 802 701 2008 86.992009 819 706 2009 105.6

2010 837 711 2010 104.66

2011 856 718 2011 104.06

2012 873 727 2012 121.81


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India Population

Per Capita Income


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Sugar Prices Coffee Prices Milk Prices

Year Sugar Avg Price (Rs) Year Coffee Avg Price (Rs) Year Milk Avg Price (Rs)

1994 12.26244444 1994 129.23511 1994 10.64440

1995 13.15021739 1995 134.63330 1995 11.71670

1996 13.61020833 1996 140.70000 1996 11.358301997 14.82808511 1997 176.52411 1997 12.23330

1998 14.24375 1998 184.00250 1998 13.67500

1999 14.67770833 1999 164.00000 1999 14.70000

2000 14.46979167 2000 149.00000 2000 16.67500

2001 14.06085106 2001 120.00000 2001 16.34170

2002 12.75066667 2002 115.00000 2002 17.58330

2003 14.85166667 2003 125.33330 2003 17.05000

2004 17.59042553 2004 136.25000 2004 18.68330

2005 18.98674419 2005 168.45210 2005 18.00830

2006 15.02791667 2006 184.00000 2006 19.25830

2007 15.33033333 2007 200.00000 2007 20.96670

2008 22.50232558 2008 230.40000 2008 22.34170

2009 31.27844444 2009 269.23770 2009 24.68330

2010 32.01666667 2010 288.27000 2010 28.06250

2011 31.76333333 2011 400.05210 2011 32.64770

2012 36.244 2012 395.66660 2012 35.10000

* all prices are Rs/kg

Government Policies

1) IMC: Indian government took cognizance of the changed tea and coffee market and set up an Inter-

Ministerial Committee (IMC) to look into their problems in late 2003. The IMC has recommended that :

Government share the financial burden of plantation industry on account of welfare measures

envisaged for plantation workers mandated under the Plantation Labour Act 1951.

To introduce means so that the agricultural income tax levied by the state governments can be

slashed and the tea industry be made competitive.

Sick or bankrupt plantation estates should be provided with analogous level of relaxation for

similarly placed enterprises/estates as are available to industries referred to BIFR (Board for

Industrial and Financial Reconstruction)

2) SPTF: The Cabinet Committee on Economic Affairs set up the Special Purpose Tea Fund (SPTF) under

the tea Board on December 29, 2006.

Aim: To fund re plantation and rejuvenation (R&R) programme. A cover of 2.12 lakh ha over a 15 year

period of time


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REGRESSION ANALYSIS 1stIteration

Year

Domestic

Consumption(in M.Kgs)

Avg.

Tea

Priceper Kg

Avg.

Coffee

Priceper Kg

Avg. SugarPrice per Kg

Avg. Milk

Price perKg

Per Capita

Income inRupees Trend IMC SPTF

1994 550 38.18 129.23511 12.26244444 10.64440 8884.00 1.0 0.0 0.0

1995 562 47.99 134.63330 13.15021739 11.71670 10180.00 2.0 0.0 0.0

1996 580 47.73 140.70000 13.61020833 11.35830 11641.00 3.0 0.0 0.0

1997 597 65.47 176.52411 14.82808511 12.23330 12729.00 4.0 0.0 0.0

1998 615 76.43 184.00250 14.24375 13.67500 14682.00 5.0 0.0 0.0

1999 633 72.79 164.00000 14.67770833 14.70000 15887.00 6.0 0.0 0.0

2000 653 61.71 149.00000 14.46979167 16.67500 18450.00 7.0 0.0 0.0

2001 673 61.66 120.00000 14.06085106 16.34170 19040.00 8.0 0.0 0.0

2002 693 55.96 115.00000 12.75066667 17.58330 20989.00 9.0 0.0 0.0

2003 714 56.03 125.33330 14.85166667 17.05000 24143.00 10.0 0.0 0.0

2004 735 64.54 136.25000 17.59042553 18.68330 27123.00 11.0 1.0 0.0

2005 757 58.05 168.45210 18.98674419 18.00830 31198.00 12.0 1.0 0.0

2006 771 66.01 184.00000 15.02791667 19.25830 35820.00 13.0 1.0 0.0

2007 786 67.27 200.00000 15.33033333 20.96670 40605.00 14.0 1.0 1.0

2008 802 86.99 230.40000 22.50232558 22.34170 46492.00 15.0 1.0 1.0

2009 819 105.6 269.23770 31.27844444 24.68330 54835.00 16.0 1.0 1.0

2010 837 104.66 288.27000 32.01666667 28.06250 53331.00 17.0 1.0 1.0

2011 856 104.06 400.05210 31.76333333 32.64770 54527.00 18.0 1.0 1.0

2012 873 121.81 395.66660 36.244 35.10000 55432.00 19.0 1.0 1.0

Regression Results

Regression Statistics

Multiple R 0.999976952

R Square 0.999953904

Adjusted R Square 0.99991293

Standard Error 0.923230695

Observations 18

ANOVA

df SS MS F Significance F

Regression 8 166411.4399 20801.42999 24404.65772 1.36964E-18

Residual 9 7.671194246 0.852354916

Total 17 166419.1111


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Coefficients Standard

Error

t Stat P-value Lower 95% Upper 95%

Intercept 533.8928994 1.597845901 334.1329092 9.80515E-20 530.2783209 537.507478

Avg. Tea Price

per Kg-0.02063442 0.036325879 -5.680365568 0.000301726 -0.288519123 -0.124169427

Avg. CoffeePrice

per Kg

0.011985751 0.011042696 1.08540075 0.305960242 -0.012994563 0.036966064

Avg. Sugar

Price per Kg-0.039492280 0.140014969 -2.82057559 0.020028178 -0.078186939 0.711658667

Avg. Milk

Price per Kg-0.060062740 0.256240725 -2.343996658 0.04373305 -1.180284196 -0.020970613

Per Capita

Income in

Rupees

0.000312169 0.000163769 1.906150751 0.005008146 0.000682641 5.83029E-05

Trend 20.127353 0.488844374 41.17333575 1.46527E-11 19.02151075 21.23319635

IMC 4.136183733 1.169174925 3.537694526 0.006336978 1.491326307 6.78104116SPTF -3.411265659 1.569815352 -2.173036246 0.057826806 -6.962434695 0.139903376

Eliminating the factors, least affecting the consumption of Tea :

SPTF

Average Coffee Price per Kg

Measures taken by IMC board in 2003, were found to have taken care of the problems in the Tea

Industry. And thus, the SPTF parameter can be removed to gauge the demand for the tea, better.

Though Coffee is a complementary product for Tea, increase or decrease in the price of coffee, makes

only marginal decrease or increase in the demand for tea.

Weaker world growth outlook, continuing high tea prices, and recent sharp decline in coffee prices will

result in marginal decline in India's tea exports from 193 million kgs to 180 million kgs in 2012.

- Economic Times : August 8, 2012


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REGRESSION ANALYSIS 2ndIteration

Year

Domestic

Consumption

(in M.Kgs)

Avg. Tea

Price per

Kg

Avg. Sugar

Price per Kg

Avg. Milk

Price per Kg

Per Capita

Income in

Rupees Trend IMC

1994 550 38.18 12.26244444 10.64440 8884.00 1.0 0.0

1995 562 47.99 13.15021739 11.71670 10180.00 2.0 0.0

1996 580 47.73 13.61020833 11.35830 11641.00 3.0 0.0

1997 597 65.47 14.82808511 12.23330 12729.00 4.0 0.0

1998 615 76.43 14.24375 13.67500 14682.00 5.0 0.0

1999 633 72.79 14.67770833 14.70000 15887.00 6.0 0.0

2000 653 61.71 14.46979167 16.67500 18450.00 7.0 0.0

2001 673 61.66 14.06085106 16.34170 19040.00 8.0 0.0

2002 693 55.96 12.75066667 17.58330 20989.00 9.0 0.0

2003 714 56.03 14.85166667 17.05000 24143.00 10.0 0.0

2004 735 64.54 17.59042553 18.68330 27123.00 11.0 1.0

2005 757 58.05 18.98674419 18.00830 31198.00 12.0 1.0

2006 771 66.01 15.02791667 19.25830 35820.00 13.0 1.0

2007 786 67.27 15.33033333 20.96670 40605.00 14.0 1.0

2008 802 86.99 22.50232558 22.34170 46492.00 15.0 1.0

2009 819 105.6 31.27844444 24.68330 54835.00 16.0 1.0

2010 837 104.66 32.01666667 28.06250 53331.00 17.0 1.0

2011 856 104.06 31.76333333 32.64770 54527.00 18.0 1.0

2012 873 121.81 36.244 35.10000 55432.00 19.0 1.0

Regression Results

Regression Statistics

Multiple R 0.999960897

R Square 0.999921795

Adjusted R Square 0.999879138

Standard Error 1.087731671

Observations 18

ANOVA

df SS MS F Significance F

Regression 6 166406.0963 27734.34939 23440.90823 6.30476E-22

Residual 11 13.01476207 1.183160188

Total 17 166419.1111


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Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 534.8956715 1.262291318 423.7497824 1.58748E-24 532.117387 537.673956

vg. Tea Price

per Kg -0.020044886 0.037505344 -5.344541329 0.00023577 -0.282997565 -0.11790015

Avg. Sugar

Price per Kg -0.0508935634 0.142004721 -3.583934602 0.004288974 -0.19638535 0.82148592

Avg. Milk

Price per Kg-0.0543306705 0.191626462 -2.835238416 0.016219445 -0.965073703 -0.12153971

Per Capita

Income in

Rupees0.000535271 0.000109941 4.868736795 0.000495707 0.000777249 0.00029329

Trend 20.394826 0.349171848 58.40913757 4.57783E-15 19.62630443 21.1633485

IMC 5.06697137 1.250221416 4.052859201 0.001906245 2.315252588 7.81869015

Demand Function :

221 0669.53948.200005.0054330.0050893.00200.08956.534 IMCTrendMPPPC CCo


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ANALYSIS of the estimated DEMAND EQUATION

Price Elasticity(-0.020044886)

Negative price elasticity reflects, a decrease in the demand for tea, with increase in its price.

"Earlier I used to drink 4-5 cups of tea daily but now I have cut it down to 2-3 cups as the tea leaves have

become costlier and the tea vendors have increased the prices. Now I have to drink less tea," said

Rizwan Khan, a consumer.

- News One India.com, 2009

Cross Price Elasticity of Sugar(-0.508935634)

Negative cross price elasticity represents increase in the demand for tea, with a decrease in the price for

sugar and vice versa

Cross Price Elasticity of Milk(-0.543306705)

Negative cross price elasticity represents increase in the demand for tea, with a decrease in the price for

milk and vice versa

Milk price hike ups tea, coffee prices in hotels

- The Hindu, January 13, 2012

* Increase in the price of prepared tea, would lead to a decline in its demand, affecting the overall

demand for tea ( raw ) product.

Income Elasticity(0.000535271)

An increase in the income of the people, leads to increase demand for tea.

Trend and IMC ( Dummy Variables )

Trend factor, depicts the changes in the lifestyle of the people, the innovation in the market, changed

taste and preferences etc, which affect the demand for tea as a consumable product.

Underscoring the need to protect the domestic market for tea, Bhanu said that in the current digital

age, where information is available at the click of a button, the opportunity to taste new beverages is

more. Compared to the past, consumers shifting to other drinks is higher, - Tea Board Chairman

M.G.V.K. Bhanu

- Business Line


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IMCGovernment Initiative towards the Tea Industry has also worked in its benefit. The government

also has a policy for automatic approval upto 100% foreign equity and overseas corporate bodies in tea

industry.

Future Predictions

Stagnant production and increase consumption led to low inventory level which is impacting prices and

the increase will continue throughout the year and in 2014 as well, - Kamal Baheti, CFO, Mcleod Russel

- Vision Commodities.com

Future Tea Consumption :

Future Tea Prices :


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References

Journal : The Marshallian Demand Curve - Milton Friedman

www.wikipedia.com

www.indiatea.co.in

www.stir-tea-coffee.com

www.economictimes.indiatimes.com

www.thehindubusinessline.com

www.dianateacompany.com

www.careratings.com

in.reuters.com

www.indiabulls.com

www.livemint.com

www.tea2030.com

www.businessstandard.com

Micro Economics - Tea - Group 2.pdf

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