Introduction The purpose of this paper is to connect and apply economic theories and concepts to real–life situations in the competitive market. Specifically, the paper will examine a CBC News article, ‘Starbucks Gives Its Prices a Jolt’ from 2006, which states Starbucks coffees and whole beans prices are increasing by 1. 9% and 3. 9%, respectively. Why is the price of a cup of Starbucks coffee rising? The CBC News article quotes the Starbucks spokeswoman who explains, “the company decided to charge more because costs, including fuel and energy, are going up. In other words, Starbucks increased prices to consumers, to cover the increased cost of production, which has been affected by a rise in energy and fuel costs. When the price rises, what will happen to the quantity of Starbucks coffee demanded? The ‘Law of Demand,’ states: “Other things remaining the same, the higher the price of a good, the smaller the quantity demanded;” Applying the law of demand, there would be a decrease in the quantity of Starbucks coffee demand.
This decrease in quantity demanded would occur because consumers assess the opportunity cost of buying one Starbucks coffee in comparison to purchasing a coffee from Tim Hortons or McDonalds. This is known as the substitution effect. Although economics theory suggests Starbucks would experience a decrease in quantity demanded, the real marketplace did not follow the law of demand. In 2006, Starbucks increased their prices, but did not experience a significant loss in sales. Instead, Starbucks sales for 2006 increased by 22% from the previous year, to 7. billion in revenue. When the price rises, what will happen to the demand of Starbucks coffee? Unlike quantity demanded, demand does not change due to a change in price; rather, change in demand relies on other factors. Assuming all other factors remain the same, when the concept of ‘change of demand’ is applied to Starbucks increasing their prices, the result would be no change or shift in demand. As mentioned, change in price causes a change in the quantity demanded, not demand.
In real life, the demand for Starbucks coffee may have shifted to the right, and an increase would be rooted in one of the six factors that change demand, most likely consumer preferences, which are often affected by current trends in society. As, “Starbucks is as much a lifestyle company as foodservice company,” more consumers may purchase Starbucks, because they place more value in the products. When the price rises, what will happen to the quantity of Starbucks supplied? In theory, if Starbucks increases its price, the quantity supplied should increase.
This relationship is based on the ‘Law of Supply’ that states: “other things remaining the same, the higher the price of a good, the greater is the quantity supplied. ” When the price of Starbucks coffee rises, the company would increase production to cover marginal cost and take advantage of the price increase. When the price rises, what will happen to the supply of Starbucks coffee? Similar to demand, a change in supply occurs when a factor other than a change in price, influences the selling plans of a producer, or in this case, Starbucks.
Therefore, assuming that only the Starbucks price for coffee increased, the supply of Starbucks would not change. One factor that will change supply is the price of factors of production. Starbucks prices increased due to an increase in the fuel and energy costs, both of which are considered factors of production. When the price of a factor of production increases, the supply decreases. Starbucks would decrease its supply because price at which they sell their coffee must increase to cover the increased cost of production.
Is the demand for Starbucks coffee considered inelastic or elastic? The elasticity of demand depends on the closeness of substitutes; the proportion of income spent on the good, and the time elapsed since the price changes. Economics’ theory would suggest that Starbucks is more elastic, because it has many substitutes, such as Tim Hortons. Thus, an increase in price of Starbucks products would be an incentive for price sensitive consumers to choose a similar product at a lower price.
In reality, Starbucks is more inelastic because of consumer preferences and customer loyalty. For example, customers buy “…Starbucks because the company, in many ways, sells them back their desires––desires for status [and] individuality. ” Starbucks is also inelastic because of its loyalty. As one study demonstrated “loyal consumers will be less price sensitive in choice than non-loyal consumers. ” When the price of Starbucks coffee increases, what will happen to the quantity of Tim Hortons coffee demanded?
If there were no other influences in the marketplace, basic economic theory would reveal that an increase in the price of Starbucks coffee would not directly increase he quantity of Tim Hortons coffee demanded. The quantity demanded for Tim Hortons coffee would only change if there were a change in the price of Tim Hortons coffee. When the price of Starbucks coffee increases, what will happen to the demand for Tim Hortons coffee? Theoretically, Tim Hortons is a substitute for Starbucks coffee. Therefore, when the price of Starbucks coffee increases, consumers would buy Tim Hortons coffee.
This is an example of a factor that influences the change of demand for Tim Hortons. This would cause an increase in demand, or a rightward shift. The reaction of a Starbucks price increase in reality would probably not cause an increase in the demand for Tim Hortons. As previously discussed, Starbucks coffee is more inelastic, which would translate into consumers continuing to purchase their product at a higher price. When the price of Starbucks coffee increases, what will happen to the quantity supplied of Tim Hortons coffee?
The price increase of Starbucks coffee would not affect the quantity supplied of Tim Hortons coffee. The quantity supplied of a product is dependent on a change of price for the particular product, as stated in the ‘Law of Supply. ’ Only a price increase of Tim Hortons would bring an increase in the quantity supplied for them. When the price of Starbucks coffee increases, what will happen to the supply of Tim Hortons coffee? Under economic theory, Tim Hortons could be classified as a substitute for Starbucks coffee, there is no direct relation between a Starbucks price increase and the supply of Tim Hortons coffee.
However, if we assumed that Tim Hortons faced the same increase costs of production as Starbucks, theory would suggest Tim Horton’s supply would decrease. Other scenarios are also possible, for example, if the price increase of Starbucks caused an increase in demand for Tim Hortons coffee, but Tim Hortons did not change it’s supply, their would be a shortage of supply for the consumers. Therefore, in reality, Tim Hortons could increase the price of their product to decrease the quantity demanded or increase the quantity supplied.
Do you think that the demand for Tim Hortons coffee is inelastic or elastic? Tim Hortons coffee is more elastic than Starbucks coffee. Although Tim Hortons coffee does have brand loyalty, their consumers purchase the product for convenience and time saving, rather than for superior experience and status. In addition, Tim Hortons consumers are more price sensitive, so a price increase will cause more consumers to stop or reduce their spending. For example, when pricing their new extra large, Tim Hortons could not charge more than $1. 90, because they would lose consumer spending.
