Applied Business Economics and Starbucks Coffee

The price of a cup of Starbucks coffee was rising when the article was written (in 2006) as North America was going through an economic incline; this gave people more money to spend. When people have more money to spend the demand for normal goods (such as Starbucks Coffee) increases. When demand increases the price also increases. The demand increase (and subsequent price increase) can also be explained by an increase in preferences. Starbucks has worked to create a niche market for itself as an “anti-fast food joint”.

Starbucks’ branding is to offer each customer an experience with their cup of coffee, not just another transaction. This branding has helped to create a preference with many consumers. They are willing to pay more for a cup of coffee made by a person with care and not a machine. 2. When the price rises, what will happen to the quantity of Starbucks coffee demanded, the demand for Starbucks coffee, the quantity of Starbucks coffee supplied, and the supply of Starbucks coffee?

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When the price rises the quantity of Starbucks Coffee demanded will decrease as a price increase will cause movement along the demand curve as there was no other influence on buying changed (which would cause a shift in the demand curve). The demand itself would remain stable, as its most likely that people will simply buy less coffee not stop buying it completely(as the price increase was not major) perhaps instead of buying a coffee every day, they would switch to coffee every other day. For some people they will simply buy the same amount of coffee, but stop buying other items.

There would of course be some people who will be unwilling to pay the increase prices at all. The law of demand states that the quantity of a food will decrease if the price of the items rises. The quantity of Starbucks coffee supplied would rise if the price increased as the law of supply states that the quantity of a good supplied will increased if the price of a good rises. This makes sense as a business stands to make more money when the price increases, therefore it would be willing to offer more goods (it has more incentive).

This would cause a movement along the supply curve. As there would be no change in other influences supply would remain the same (i. e. there would be no shift in the supply curve. ) 3. From the scenario described above, do you think that the demand for Starbucks coffee is considered inelastic or elastic? Explain. In my opinion Starbucks coffee would be an elastic good as it is more of a luxury than a necessity. People do not need coffee to survive as the do with food, medication, clothing etc.

An example of the elastic nature of Starbucks coffee would be that after the global recession in 2008 profits for Starbucks coffee plummeted by 77% in one quarter. This was due to people having less money to spend on luxury items such as Starbucks coffee. It is interesting that Starbuck chose to lower its prices on many of its basic drinks, as it was struggling to retain customers during the recession. It should always be considered that some for some people Starbucks coffee would be inelastic as they would rather give up something else than their coffee.

It is a matter of preferences. 4. What will happen to the quantity of Tim Hortons coffee demanded, the demand for Tim Hortons’ coffee, the quantity of Tim Hortons coffee supplied, and the supply of Tim Hortons’ coffee as a result of the price rise at Starbucks? Why? Do you think that the demand for Tim Hortons’ coffee is inelastic or elastic? Explain. Assuming that Tim Hortons coffee is a substitute for Starbucks coffee than the quantity of Tim Hortons coffee would increase (substitution effect) if the price of Starbucks coffee increased.

As people have the same amount of income to spend (assuming no change to income) people would purchase Tim Hortons coffee rather than Starbucks coffee as Tim Hortons is cheaper than Starbucks coffee. As the demand for Tim Hortons coffee would increase. The supply would remain stable as there are no other changes. If people don’t like Tim Hortons coffee it is unlikely they will start purchasing it instead of Starbucks, as some people see it as an inferior good. It’s more likely that people who purchase both Starbucks and Tim Hortons would just purchase less Starbucks and more Tim Hortons coffee.

The demand curve for Tim Hortons coffee will shift rightward due to the cross elasticity of demand between Starbucks and Tim Hortons’ coffee. In my opinion Tim Hortons’ coffee would be an elastic good as it is not necessary for survival. Many would also consider Tim Hortons coffee to be an inferior good with negative elasticity, i. e. people will buy more Tim Horton’s coffee when income is low, but when income rises they will purchase less (and presumably purchase more Starbucks coffee, the luxury good).

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