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Principles of supply and demand inform managerial decision-making

Introduction --

Economics is the social science that studies the production, distribution and consumption of goods and services. The economy comes from ancient Greek term management ( "a home," the government) "rules of the house (hold)"1 The current economic models developed outside the broader sphere of political economy in the 19th century, due to the desire to use an empirical approach more akin to physics sciences.2

A definition that captures much of modern economics is that of Lionel Robbins in a 1932 essay: "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses."3 "shortage" means that available resources are insufficient to satisfy all the desires and needs of human beings. In the absence of scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of options, which are affected by incentives and resources.

Economics aims to explain how economies work and how economic actors interact. The economic analysis is applied throughout society, in business, finance and government, but also crime, education, family, health, law, politics, religion, social institutions, war and science . The dominance of economic expansion in the social sciences has been described as economic imperialism.4

Common distinctions are drawn between the various dimensions of the economy between positive economics (which describes "what is") and normative economics (defending "what should be") or between economic theory and applied economics, or between mainstream economics and heterodox economics. However, the distinction between the main textbook microeconomics ("little" economics that examines the economic behavior of agents including individuals and firms) and macroeconomics ("great" the economy) to address issues of unemployment, inflation, monetary and fiscal policy for the whole economy.

The following report talks about how supply and demand of tea, influences managers to make decisions. The company we will look into is Unilever and an in-depth analysis of the factors of production, the Global tea market survey, the economies of scale, fixed and variable costs is done.

Economics of tea -

Tea is the most popular beverage in the world in terms of consumption. Its consumption equals all other manufactured drinks in the world - including coffee, chocolate, soft drinks and alcohol - to together.5 most consumed tea outside East Asia is produced in large plantations in India or Sri Lanka, and is intended to be sold to large enterprises. Given this large-scale industrial production there are many small "gardens", sometimes tiny plantations producing highly sought after teas appreciated by gourmets. These teas are scarce and expensive, and may be compared with some of the most expensive wines in this regard.

India is the world's largest tea-nation, though the per capita consumption of tea consumption remains a modest 750 grams per person per year. Turkey, with 2.5 kg of tea consumed per person per year, is higher per capita consumer in the world.

Factors of Production -

Supply and demand is one of the most important factors that determine the production of tea. Historically, Taiwan's tea production was mainly for export. Oolong tea is the most important tea exported initially, but was replaced by black tea and green tea. Recently in Taiwan, due to a sharp increase in tea production costs, which have lost significant markets and the production of partially fermented Chinese tea for domestic consumption has become more important. Both the area of tea plantations and tea exports have been reduced. However, the amount of total tea production has been fairly well because of a gradual increase in tea production per unit area as a result of advances in culture technology and variety improvement. Currently, 23 000 M.T. of tea are produced from 23 000 hectares of tea plantations.

The quality of tea is affected by a number of factors can be classified into 4 main themes, namely, cultivar, environment, cultural practices and processing techniques of tea. Cultivars: The fermentation capacity, chemical components and agronomic traits vary with the cultivars. For the partly fermented tea, quality is more important than performance. Environments: Soils and climate are two important factors affecting quality. High elevations are considered the most favorable for producing quality tea. Cultural practices: These, like plowing, weeding, fertility management, irrigation, plant protection and crop management can affect the quality although its effect on performance may be higher. Among the management practices that affect quality, leaf age and season of harvest are the most significant. Treatment Technique: The technique of partially fermented tea processing involves a series of complicated operations (extinction, tremors, pan, rolling and drying), which, in fact, be regarded as an art. Small changes in the handling of each step can affect the final quality, including appearance, color tea liquor, aroma and flavor. It is not surprising to find that the qualities of the teas from a batch of fresh leaves can vary greatly from one individual processors.6

Global Tea market Summary

World tea production grew by more than 3% to an estimated 3.6 million tons in 2006. The record production levels of tea in China, India and Vietnam in 2006 offset declines in major tea producing countries. The size of the global tea market in 2007 in terms of retail value was 23.323 billion U.S. dollars and in terms of sales volume was 1,765 million kilograms. The year of the annual rate of growth of world tea market for the period 2006-07, in terms of sales value was 4.5% and in terms of sales volume was 3.5%. The world per capita consumption of tea in 2007 was 0.3 kg. Driven by double digit growth in sales of black bags of specialty tea, green tea and other types, the global tea market is expected to grow by almost 10% in value and over 13% in volume between 2005-2010.

Global Tea Production: In 2007, China was the largest producer of tea followed by India, Kenya, and Sri Lanka. Graph 1 below shows the production volume of the world's major tea producers.

Though, India is the second largest producer of tea in the world, the domestic consumption of tea is quite high, resulting in India's exports being only the fourth largest. Global Tea Imports: In 2007, Russia was the biggest importer of tea followed by the U.K., U.S., Pakistan, and Japan. The following graph shows the import statistics for the world's major tea importers.

Global Supply and Demand of Tea: From 2004 through 2007, global supply of tea has exceeded demand. Graph 4 below, shows the global supply and demand statistics for tea during that period.

Tea prices at auctions of Different World (Q3): The following table compares the price of tea in 2008 (third quarter), in different auction houses major tea producing countries with the price of tea in 2007 (in the third quarter). As shown in the table, all regions recorded double-digit rates of price growth over the past year.

Issues and trends affecting the global tea market

The increasing wealth: the rapid economic growth in a number of developing nations like China, India and Russia, has resulted in an increase in middle-class consumers with high disposable income. These consumers have shown premium buying behavior, improving their purchases of tea packaged, branded and specialty varieties.

Health and Wellness growing trend: the growing health and wellness trend has been an important engine for growth in the value of tea in the world tea market. These consumers are willing to pay a premium price for the advertised health benefits of tea varieties with special herbal and fruit teas and other tea.7

Unilever is a multinational company, formed by British and Dutch parents, which has many of the brands in the world of consumers in food, beverages, cleaning products and personal care products. Unilever employs 174,000 people worldwide and had revenue of € 40.5 million in 2008. Unilever is a dual-listed company consisting of Unilever NV in Rotterdam, the Netherlands and Unilever PLC in London, UK. This provision is similar to Reed Elsevier and Royal Dutch Shell prior to their unified structure. Both Unilever companies the same leaders and effectively operate as a single business. The current CEO of Unilever NV and PLC is Michael Treschow, while Paul Polman is Executive Director of the Group. Unilever's main competitors are Procter & Gamble, Nestle, Kraft Foods, SC Johnson & Son, Reckitt Benckiser and Henkel. Unilever's mission is to add vitality to life. We cover everyday needs for nutrition, hygiene and personal care with brands that help people feel good, look good and get more out of life.8

Unilever economies of scale --

Specialization --

Agriculture provides more than two thirds of the raw materials for Unilever brands.

On the basis of its reputation of best practices, Unilever is now an industry leader with

Sustainable Agriculture Initiative. The way forward, in his view, is to develop

Environmental sustainable supply chains that offer benefits to create value for

The stakeholders and meet the needs of consumers, now and in the future. , While "Sustainable agriculture is productive, competitive and efficient, while protecting and improving

the natural environment and conditions of local communities ".

Technical economies --

• Production of crops with high yield and nutritional quality

to meet current and future needs, while keeping resource inputs as low as possible

• Ensure that adverse effects on soil fertility, water and air quality and biodiversity of the

agricultural activities are minimized and the positive contributions are made whenever possible

• Optimizing the use of renewable resources and minimizing use of nonrenewable resources

• Enable local communities to protect and enhance their welfare and environments.9

Financial economies --

Unilever owns more than 400 brands, as a result of acquisitions, however, the company focuses on what is called "billion dollar brands, 13 brands that each reach annual sales of over € 1 billion. Top 25 Unilever brands represent over 70% of sales. The brands fall almost entirely into two categories: Food and Beverages, and Home and Personal Care.

Economies of Marketing --

In 2008, Unilever was honored at 59th Annual Technology and Engineering Emmy Awards for "Outstanding Achievement in Advanced Media Technology for the creation and distribution of interactive commercial advertising Delivered through Digital set top boxes" for your program Ax: Boost Your ESP.10

The diseconomies of scale --

Unions representing employees of Unilever worldwide have registered a number of complaints about the company, including tens of thousands of jobs lost in recent years. Many former Unilever employees are outsourced, unions leading to write about "the vanishing Unilever worker". In one example of such a dispute, in September 2008, Unilever Pakistan called the police and the paramilitaries as a transfer of labor union protested a third. In December 2007, a global day of industrial action against Unilever was called.11 In early October 2008, the global union federation representing food workers, the IUF, launched a new global website focuses on these issues require Unilever Watch.

Unilever's Fixed and Variable costs in Sri Lanka12 - Item

1998 /99

2000 /01

2002 /03

2004 /05









A- General charges

Supervisory staff, monthly paid salaries, allowances etc, and directors, visiting charges.








Holiday wages, feeding and schooling, concessionary grants, sanitary, medical and maternity benefits, contribution to E.P.F.







Up-keep of bungalows, roads, minor buildings, etc.,interest, bank charges and commission, insurance, depreciation of fixed assets.







Stationery, postage, etc., Auditors' fees, rent, acreage fees, and local taxes, other general expenses.







B- Up-keep and cultivation

Labour wages including all allowances - weeding and upkeep of fences, control of pests and diseases, manuring, plucking ,pruning,supply of vacancies, field watchers, miscellaneous.







Materials and tools-fencing, control of pests and diseases,manure, other materials and tools.







C- Transport costs incurred in production

Wages of drivers and cleaners, repairs to vehicles, fuel.







D- Cost of green leaf (1)

(a) Cost of estate leaf







(b) Cost of bought leaf







(c) Cost of green leaf







(weighted average)

E- Manufacturing costs

Factory labour,fuel for engines,fuel for driers, eletricity, machinery up-keep, packing materials, factory sundries.







F- Marketing cost and agency house expenses

Transport to Colombo auctions or port of shipping, storage and handling brokerage, agency charges, and other expenses.







Total cost per kilogramme of made tea.








Fixed, Variable and Total Costs

Unilever's managerial decision's making based on the Demand and Supply of tea

Unilever, the largest tea company in the world, could be on the road to discover the treasures to tea in a sustainable manner with a balanced approach that benefits producers without penalizing consumers. As the international buyer 12% of black tea in the world and selling finished products packaged tea in 130 countries, Unilever is in a central place to have a significant impact and difference. Unilever formally announced its objectives in mid-2007. Consumer focus is on the UK, a market of downing 60 billion cups a year. The tea producing nations worldwide are affected by the current price malaise.

The company anticipates certified tea can be priced 10-15% higher than currently searching for tea auctions, allowing producers around the world to collect 2 million [pounds sterling] more for their tea in 2010 and another 3 million [pounds sterling] in 2015.

Chief Executive Patrick Cescau said: "This decision will transform the tea industry, which has been suffering for years from oversupply and underperformance. Will not be achieved immediately, but we are committed to doing it because we believe that is what right for people who drink tea, people along the entire length of our supply chain, and for our company. The company believes the program has the potential to reassure consumers about the origin of tea to enjoy drinking, while allowing brands to differentiate the company from competitors. "

The standard U.S. consumers keep buying cheaper products, which means that you should only select the bands of farmers and growers of certified production backgrounds will benefit.

Kenya, the world's third largest tea producer and exporter of superior tea is the first target for tea Unilever license "sustainable". The first priority was the production of tea estate in Kericho in the Rift Valley, certified by the Rainforest Alliance. The farm generates 90% of demand Unilever Tea Kenya and one fifth of all the tea in origin by the company worldwide.

Sustainable development is defined as "the practice of development that meets the needs of the current generation (both producers and consumers) without compromising the ability and the ability of future generations to meet their own needs." Unilever has a long history in Kericho goes back to 1984 when the estate was purchased by Brooke Bond, and claimed at least a generation of experience and achievements in sustainable development of tea.

Richard Fairburn, who is executive director of operations of the Kenyan tea company told The Independent of reach sustainable development practices in Kericho, including energy from renewable sources like hydroelectric power, fast-growing plantation timber species such as heavy eucalyptus, for boilers of fire, water conservation and prevention of soil erosion. Other tea farms in Kenya, Tanzania, Malawi, Indonesia, India, Argentina and Sri Lanka will continue. Finally, certification will extend to thousands of farms in Africa, South America and Southeast Asia, improving the livelihoods of around two million people on three continents, Unilever claims.

Michiel Leijnse, global manager of brand development for Lipton holds 60% of consumers say they take social and environmental factors when deciding which products to buy, but are delayed because of the price and availability. Unilever to circumvent this block the sale of sustainable tea, without any difference in price compared to regular tea.

Great progress

Since August 2007, mixing a single certificate Lipton tea produced in the plantation in Kericho in Kenya has been available in restaurants and catering companies in Europe. Lipton Kericho Estate Tea is certified sustainable by the Rainforest Alliance and marketed by Foodsolutions Europe. "The state met all the stringent standards required for certification, including the good conditions for employees, environment-friendly processes agricultural and wildlife protection," said Leijnse. But this first of many sustainable tea products carrying brand names from Unilever also was boosted by a strong business logic.

The hard part comes in dealing with 430,000 small farmers and tea farmers in Kenya who claim a massive 62% of Kenya's market share compared with Unilever in just over 10%. Certification of sustainable tea will make the market highly competitive and smallholder tea in the world should be pursued and not left behind.

Promotion and Marketing

Thanks to the promotional activity of the leading chain of coffee shops, including Costa Coffee, Café Nero and Starbucks, the average "Brit" is now able to "clean" with a variety of origins of coffee and drinks and longer think of the richest coffee brown granules snapshot of Brazil. Britain is still a nation of tea with strong evidence of tea making a comeback. Fall in the price of tea in the last three decades, especially in relation to coffee, tea has helped more than maintained. Unilever wants to be in front of this brave new world of tea. "" The certification will help establish the standards the rest of the supply chain and tell the story credible to consumers, "said Leijinse." We want to lead change within the industry. We are the largest player - we can not change the industry for ourselves, but we point in the right direction. We want to stop this trend in tea prices down. "13

References -


2. Clark, B. (1998). Political-economy: A comparative approach. Westport, CT: Preager

3. Robbins, Lionel (1945) (PDF). An Essay on the Nature and Significance of Economic Science. London: Macmillan and Co., Limited., p. 16

4. Lazear, Edward P. (2000|. "Economic Imperialism," Quarterly Journal Economics, 115(1)|, pp. 99

5. Alan Macfarlane; Iris Macfarlane (2004). The Empire of Tea. The Overlook Press. pp.32

6. W. Chiu, FACTORS AFFECTING THE PRODUCTION AND QUALITY OF PARTIALLY FERMENTED TEA IN TAIWAN, ISHS Acta Horticulturae 275: International Symposium on the Culture of Subtropical and Tropical Fruits and Crops.

7. Alexander Aginsky, September 28, 2009, Russian Tea Market Research Report, Market and Industry Report.


9. Cultivating sustainable agriculture, 2001, Unilever MAGAZINE Reprinted from Unilever Magazine 119, Produced by Unilever Corporate Relations.




13. Mabbett, Terry, 2008, Environmentally hot tips sustain the price of tea: Dr. Mabbett examines the reasons for the continual decline in tea prices, and what companies like Unilever are doing to successfully sell tea produced on sustainable farms at low, competitive prices, Publication: Tea & Coffee Trade Journal.