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 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 7.8 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...
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