Demand and Supply

According to law of demand, the higher the price of a product, the lower is the quantity demanded (Parkins, 2005). For instance, when OldTown raises the price of coffee mix, consumers will demand lesser quantity of coffee mix. There are two reasons that explain this theory, which are substitution effect and income effect. For substitution effect, it shows that when the price of OldTown White Coffee's coffee mix increases, then consumers tend to buy the instance coffee from Starbucks as a substitution. As for the income effect, when the price of the coffee mix rises, assuming the income of the consumers are constant, consumers' buying power will decrease and only can buy a fewer quantity of coffee mix compared to before. On the other hand, the higher the price of the good, the more is the quantity supplied and this theory can be defined clearly in law of supply. For example, when the price of OldTown White Coffee's coffee mix is higher, then they have the incentive to supply more coffee mix. Because it is believed that they can earn more profit if they supply more coffee mix in a higher price. As a result, changes in price of the coffee mix will lead to a movement along the demand and supply curve.

Graph 1: Movement along the Demand Curve

Graph 2: Movement along the Supply Curve

Nonetheless, other factors which are non-price determinant will cause the demand and supply curve to shift inwards or outwards. For example, if the expected future prices of coffee mix is higher, then the demand increases and shift to the right whereas the supply falls and shift to the left. However, if the expected future prices falls, then the demand will decrease and shifts to the left whereas is supply will increase and shifts the curve to the right.

Graph 3: Shifting in Demand Curve (Gregglee, n.d.)

Graph 4: Shifting in Supply Curve

Besides, there are other factors that could affect the demand too. Back in year 2000, there was a company named Aik Cheong who passing off the design of the package by OldTown White Coffee, this led to a serious fall in demand for OldTown White Coffee's coffee mix. This is because they made numerous of customers to change their loyalty from OldTown White Coffee to Aik Cheong because everyone has their own prefer taste, some cannot really differentiate which is OldTown White Coffee's coffee mix and Aik Cheong sold their instant coffee cheaply (Tan, 2013). Therefore, the demand curve OldTown White Coffee's coffee mix shifted to the left as shown in Graph 5.

    

Figure 4: OldTown White Coffee Original design (Alibaba, 2013)

Figure 5: Aik Cheong passing off design (Doorway, n.d.)

Graph 5: Demand curve shift to the left (Boundless, n.d.)

By using the Aik Cheong Company mentioned above, what happens to demand of OldTown White Coffee's coffee mixes if Aik Cheong sells their instance coffee on a lower price?

If Aik Cheong sells their product at a lower price, then OldTown White Coffee’s demand curve will shift to the left. This is due to the one of the determinants of changes in demand, which is the price of related goods. In this situation, Aik Cheong’s coffee mix is a substitute for OldTown White Coffee’s coffee mixes. Subsequently, if the price of OldTown White Coffee’s coffee mixes rises, consumers buy fewer OldTown White Coffee’s coffee mixes and more Aik Cheong’s coffee mixes. As a result, the demand for OldTown White Coffee’s coffee mixes falls.