Price Elasticity: Consumption, Factors and Price Changes at Starbuck's
Basic economic principles explain the idea that if the price of aproduct rises, consumers will purchase less of the product. However thereare some items which do not seem to fit into this principle (NationalCouncil on Economic Education, 2003). This is caused by the priceelasticity of the product in question. Price elasticity of demand can be thought of as a measure of demandfor a product in relation to price change. It is a question of whether ornot sales for a particular item drop if the price rises, or if, in fact,the quantity of the item we purchase drops when prices rise. If priceincreases lower the sales of a product, the product is price elastic. Ifprice increases do not affect the purchasing of a good, the product isprice inelastic (National Council on Economic Education, 2003). Starbuck's gourmet coffee is an example of a price inelastic product.Studies have shown that the average estimated price elasticity for coffeeis around .25 (Gwartney & Stroup, 2003). The calculation for priceelasticity of demand is the percent change in quantity demanded of aproduct divided by the percentage change in price. To find the percentageof change, the amount of the change is divided
Generally speaking, any increase in price will not dramatically alter thedemand or quantity purchased for the product. Finally, short term elasticity tends to be less elastic than long termamount (National Council on Economic Education, 2003). Again, since Starbuck's is arelatively stable and known brand of gourmet coffee, the market for theitem is fairly stable. Yet Starbuck's recently announced their plansto raise their prices between 4 and 5 percent at the beginning of theirfiscal year. Since Starbuck's gourmet coffee is a relatively inelastic product, onecan predict the impact of raising or lowering the price of this product. On average,costs have risen between 4 to 5 percent for most gourmet coffee chains. Over the past year, many gourmet coffee company's have increased theirprices, citing rising labor costs and higher dairy prices. 10 per cup of coffee(Gray & Merrick, 2004). Thus, while there are certainlysubstitutes for gourmet coffee, there are not many for Starbuck inparticular. Currently, a 12 ounce cup of coffee at Starbuck's is about $1. Secondly, ifthere are a large number of compliments for the product, the item may havelower price elasticity, since other items rely on the purchase of the mainitem. After the past price increase in 2000, which equaled about $. Similarly, lowering theprice of the product will also not drastically reduce the number of itemspurchased.
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