micro economics - tea - group 2.pdf
TRANSCRIPT
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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