Supply and Demand, Markets, Prices and Price Setting Essay

Explain what happens to price and quantity of coffee when the following events occur: 1. An advertising campaign highlights scientific studies that find drinking coffee can help reduce weight gain. a. What do you think would happen? People will buy more coffee, drink more coffee, and research what coffee will help them lose more weight. Case in point, does espresso assist in more weight loss then normal coffee? Espresso contains more caffeine, so the thought process might be, that you can lose more weight by drinking espresso than you would drinking your everyday run of the mill ground up coffee.

Coffee will begin to go up in price because the demand is greater. What about coffee makers and espresso machines? Will people begin to purchase a newer model? Will their standard 5 cup coffee machine suffice? Will consumers buy espresso machines, if espresso indeed guarantees more weight loss to the consumer? Yes, indeed all the above would happen. Take a look at the Starbuck’s Coffee craze. “In 2008, Americans were willingly paying $3 or more for a cappuccino or a latte, and Starbuck’s had grown to become an international chain, with over 16,000 stores around the world.

The change in American consumers’ taste for coffee and the profits raked in by Starbucks lured other companies to get into the game. Retailers such as Seattle’s Best Coffee and Gloria Jean’s Coffees entered the market, and today there are thousands of coffee bars, carts, drive-through, and kiosks in downtowns, malls, and airports all around the country” (Rittenberg and Tregarthen,2009) This faddish coffee from Starbucks is just a strong espresso coffee with steamed milk and flavoring.

No real health benefit to it at all. It is actually dangerous. Have you ever bought a Venti Carmel Macchiato and you are walking out of the store not paying attention and you drink instead of sip? Ouch! The whole inside of your mouth is now burned and the breakfast sandwich you bought is now worthless. We pay for this things and everyday and the figures show it. In 1986 Starbucks had four stores in Seattle. The cost to purchase this company was 3. 8 million. “In the 3rd quarter of fiscal year 2011, Starbucks made 2. billion dollars” (Rittenberg and Tregarthen,2009) According to book “The quantity demanded of a good or service is the quantity buyers are willing and able to buy at a particular price during a particular period, all other things unchanged” (Rittenberg and Tregarthen,2009)). If the demand can be met on extremely long term basis, then the price of coffee will begin to level out, or so the consumer will think. Consumers will eventually get used to the price as they continue to buy coffee. However, if the coffee growers cannot keep up with the demand, then the cost to buy coffee will increase as the supply decreases.

So if this was a reality, and weight loss could be achieved through the consumption of coffee. Move over Beethoven, the sky is the limit. b. Coffee plants from major producing countries are affected by drought. Droughts caused by Mother Nature, or let’s just say civil war because South America always has something going on, can create a lack of supply. “Storms, insect infestations, and drought affect agricultural production and thus the supply of agricultural goods. If something destroys a substantial part of an agricultural crop, the supply curve will shift to the left” (Rittenberg and Tregarthen,2009) . The price of tea decreases. If your losing weight drinking coffee, who will to buy tea? All the tea drinking countries and the southern states would probably still buy tea and love it because it is will be much cheaper because there will be more supply than demand. Since my former mother in law is British and lives by tea every morning, noon and night, I would say those countries are about to get carried away with the sell on tea. My mother-in-law’s mum would say coffee is for the uncivilized, and I guess I am uncivilized.

So, if that is the general consensus among the British then tea is about to be stock piled in tea drinking countries because there is going to be a huge sale. I know there will not be enough tea drinkers in these countries to keep the cost of tea at its current price. There are obese people all over the world who want to lose weight and even skinny people want to stay skinny. “As we have seen, when either the demand or the supply curve shifts, the results are unambiguous; that is, we know what will happen to both equilibrium price and equilibrium quantity, so long as we know whether demand or supply increased or decrease.

However, in practice, several events may occur at around the same time that cause both the demand and supply curves to shift in the same direction or opposite directions” (CITE). d. In order to protect growers that have better working conditions for workers (referred to as Fair Trade), a price floor on coffee is implemented. The explanation for fair trade,” refers to the movement to improve the lives of growers and other producers through trade. ” http://www. ssireview. org/articles/entry/the_problem_with_fair_trade_coffee This system is not the most popular system amongst some growers.

Growers say that fair trade is not living up to the promise of reducing poverty. I would say if you put a fair price on anything, you are going to make a decent amount of money, especially on coffee if it really made you skinny. For each event, you must specify how it effects either demand, quantity demanded, supply, or quantity demanded. It is also important to demonstrate how the change will affect the market demand or supply curve. Also, be sure to state any assumption you are making regarding the relationship of the event and coffee. e. g. Price of donuts decrease.

Have you had a fresh right out of the deep-fryer doughnut from Krispy Kreme? If you have, it would be hard to believe that the price would drop. I would pay $5 for one donut from this place. However, for instructional purposes only, let’s talk about why they would decrease in price. Why isn’t anyone buying donuts? Coffee and donuts go together. It’s the same concept as Oreos cookies and milk, and it just goes together. I prefer Dunkin Donuts; you can sit at the counter order a donut and some very aromatic Dunkin Donuts coffee. You cannot and should not have one without the other.

So, if you lower the price on donuts, will you buy of them when you purchase coffee? I would have to say yes. Krispy Kreme donuts don’t need coffee to go with they are fresh but when they cold it’s a match made in heaven. Assume that cookies are a complement to coffee. If donuts are cheaper, then the consumer will increase quantity demanded of donuts. If consumers buy more donuts, then there will be a need for more coffee to go with the donuts so the demand for coffee will increase. This event causes a shift of the demand curve to the right.

The shift will cause price and quantity of coffee to increase. 2. What are the major determinants of elasticity in your own words? Does the consumer really want donuts or cookies? The consumer chooses donuts because the consumer likes them more with coffee rather than cookies. Is it really going to matter if the consumer gets on or the other? It is all about personal preference. 3. What type of elasticity (elastic, inelastic, zero, etc. ) do you think coffee has based on the major determinants of elasticity. Explain your reasoning. Elastic.

You can choose from a variety of other brands if you choose to. On certain days, you will drink something different, depending on how much you want to spend that day. 4. Based on your answer above, what happens to total revenue when the price of coffee is increased? Why? Let’s say you prefer Folgers coffee. You typically drink this brand of coffee on a regular basis. Then you notice a sale on Seattle’s best and, you purchase this coffee instead of your usual brand. Folgers’s coffee just lost revenue for not having their items priced effectively for that week.

Recall from the PowerPoint presentation: Inelastic goods (goods in which consumers are less responsive to changes in price): e < 1 Rent and car payments are just out-right a pain in the neck. We don’t respond to them because we need a place to live and a method to get to and from work. Elastic goods (goods in which consumers are more responsive to changes in price): e >1 These items are more like perishable items, such as groceries and soda. Albertsons has a special every other week; buy a pack of meat get a pack of meat for free (equal or lesser value. However, people still need to eat and people will buy because it’s not a huge necessity. There are alternatives for meat, like chicken, hot dogs, hamburger meat. In this course, we use the absolute value of elasticity. It is always a calculated value of -1, due to the law of demand.

References

Rittenberg, L. , & Tregarthen, T. (2009). Principles of Microeconomics (Vol. 1). Irvington: Flat World Knowledge. Retrieved November 26, 2012 http://www. ssireview. org/articles/entry/the_problem_with_fair_trade_coffee