Economics of Starbucks

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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…show more content…
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
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