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 put together (Macfarlane, 2004). Most consumed tea outside East Asia is produced in India and Sri Lanka, which is intended to be sold to large enterprises. Unilever, the largest tea company in the world and as the international buyer of 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. 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 drinking nation, though the per capita consumption of tea consumption remains a modest 750 grams per person per year (Ceylon tea portal, 2009). Turkey, with 2.5 kg of tea consumed per person per year, is higher per capita consumer in the world (Market search world, 2009).

Supply and Demand is one of the most important factors that determine the production of tea. The quality of tea is affected by a number of factors and can be classified into 4 main factors, namely, cultivar, environment, cultural practices and processing techniques of tea. 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 every individual processor (Chui, 1990).

Economics is the study of what, where and for whom to produce and is central to all managerial decision making whether at the level of the firm, household or government (Philp, Wheatley, Galt, 2009). The company looked into is Unilever and an in-depth analysis of the Global tea market is done. Due the high fluctuations in the supply and demand of tea, it becomes a challenging task for managers to make decisions. The report talks about how managers make decisions even in these fluctuations. The principles of demand and supply and the role of the invisible hand, the economies of scale are explained, finally ending with a summary and conclusion.

Theoretical Section

The principles of supply and demand are fundamental to the study of markets (Philp, Wheatley, Galt, 2009). It is a model to determine a price in the market. In a competitive market, price will level the quantity demanded by customers and the quantity supplied by producers, creating a balance in price and quantity.

Supply and demand is perhaps one of the most fundamental concepts of economics and is the backbone of the market economy. Demand refers to what Quantity of a product or service is desired by buyers. The amount requested is the amount of a product people are willing to buy at a specific price. The relationship between price and quantity demanded is known as demand relationship. Supply represents how much the market can offer. The quantity provided refers to the amount of a particular good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is available on the market is known as the supply relationship. Price is therefore a reflection of supply and demand.

The Law of Demand

In mainstream economics effective demand is driven by a number of factors which include the price of the good, income levels of consumer, prices of substitute goods, social and climatic factors. Therefore for the production of tea, the quantity demanded (QDi) is a function of its price (pt), the income levels of each of the (n) consumers (Y1….Yn), the price of substitute goods such as coffee and chocolate drinks (c1….ci-1) and various social and climatic factors (S). Hence the market demand can be written as

QtD = f (pt, Y1… Yn, c1…ct-1, S)

In the analysis of supply and demand, they will often hold the factors constant and analyze markets solely in terms of price. The bar above the factor signifies a constant and hence market demand can be re written as

QtD = f (pt, Y1… Yn, c1…ct-1, S)