Starbucks Corporation (Starbucks) is considering whether to increase or decrease the price of their product in order to increase revenue. Deciding upon which direction to go with the price depends upon the price elasticity of the product. According to the law of demand: “All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded” (McConnell & Brue, 2004, p. 40). Starbucks is a retailer of specialty coffee. It retails a variety of hot and cold beverages, complementary food items, coffee-related accessories and equipment, teas and other non-food products through retail stores in approximately 39 countries worldwide. The company operates primarily in the US. It is headquartered in Seattle, Washington and employs about 146,000 people. (Starbucks Corporation Overview, 2008) Due to increased cost of ingredients, Starbucks is considering a 2% price increase in order to increase revenue. However, Starbucks is concerned that consumers will be impeded by the price increase and will shop for alternatives to Starbucks specialty products. Consumers might stop purchasing the specialty coffees if the products become more of a luxury or too expensive to fit into their budget.
The following will analyze the effects of increasing the price of Starbucks coffee. A determination will be made as to the price elasticity of demand of the product and whether the product is elastic or inelastic. A determination will also be made as to how an increase in a consumer’s income would affect the demand for Starbucks products.
Using Elasticity of Demand to Increase or Decrease Prices
What is Elasticity of Demand?
Starbucks future revenue growth in the coffee market depends on analyzing the current market conditions of the coffee industry. Price elasticity of demand will help...