Coffee Pricing: A Study of Supply, Demand, and Elasticity

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The price of coffee and the quantity available may be controlled by a variety of events that shape the market. The following scenarios will study these controls as related to supply and demand. After a scientific study demonstrated that coffee contains healthy antioxidants, public reaction will generally respond positively. A shift in the demand curve will result where the quantity expected of the product will increase from Q1 to Q2 (Heakal, 2003, p. 4). In the case where major coffee producing economies experience drought, disequilibrium will come into play as quantity Q* cannot account for the demand at price P*; producers will likely account for this fluctuation by raising P* (Heakal, 2003, p. 2). In the case where the price of donuts grows, coffee demand will decline as donut shops experience less patronage of their stores, which in all likelihood have coffee machines. A downward movement of P* may appear imminent as marketers work to adjust to the elastic nature of the coffee market (Baker, 2006, p. 4; Heakal, 2003, p. 3-4). The cost of maintaining workers will rise along with prices passed onto the consumer in the event that Fair Trade regulations are further tightened due to increased cost of production; the heightened cost of production will lead to a larger supply (Heakal, 2003, p. 1). All scenarios present real-world possibilities for potential fluctuations in the market.

In the case of Mr. Dash who drinks coffee no matter what, different market implications apply. His consumer habits exhibit inelastic market activity because of his unresponsiveness to fluctuations in coffee prices (Baker, 2006, p. 1). If coffee prices increase by 30% and the quantity demanded is reduced by 10%, elasticity is -33% based on formula E=ΔQ % / ΔP %. If the coffee prices increase in the outlined economic scenario above, revenues will decrease because of weakened demand to compensate for the higher price (Heakal, 2003, p. 3). Therefore, the coffee market is elastic (Baker, 2006, p. 1). Such a characteristic will shape the price setting.

References

Baker, S. L. (2006, January 1). Elasticity. Economics Interactive Tutorial. Retrieved from http://hspm.sph.sc.edu/COURSES/ECON/Elast/Elast.html

Heakal, R. (2003, January 1). Economics Basics: Supply and Demand. Investopedia. Retrieved from http://www.investopedia.com/university/economics/economics3.asp