Marketing

The Impact of Coffee Beans on Price Elasticity Charles Schredder University of Phoenix Supply and demand significantly impacts prices, quantities, and market equilibrium. Simply stated, market equilibrium occurs when a demanded quantity is equal to the supplied quantity of the same product. An example of market equilibrium was seen in the case of the coffee bean. During the fall of 2006, supply and demand of the coffee bean changed, affecting market equilibrium. The production of coffee beans from two major world suppliers, Brazil and Vietnam, was reduced; the supply decreased in Brazil for economic reasons that started a decade earlier, and in Vietnam, the supply lessened due to harsh weather patterns throughout the year. Concurrently, reduction in exported coffee beans from these countries resulted in a shortage of the world’s supply. Meanwhile, in America, the shortage of coffee beans stimulated market price increases for the purchase of this import. As a result, this increase also drove the cost of a Starbucks brand cup of coffee up roughly 11 cents. The market will always strive to eliminate surpluses and shortages to shift back to the market equilibrium. Markets in equilibrium are maintained mainly through adjustments in product cost. Neither buyers nor sellers make this decision; supply and demand make this determination. When the price of a product, such as the coffee bean, is too low, consumers will eagerly purchase it. The supply is expended quickly, and the seller must increase the price to offset his or her dwindling supply of beans. If the company’s increases the price too highly, consumers will more than likely buy less of the product discontinue purchasing it all together. In turn, the company will have product it cannot sell and it will reduce the price accordingly to sell the excess amount. When an in-demand product is sold at a price that both the consumer is willing to pay and does not exhaust the supply, then the market remains in equilibrium. The supply and demand pattern of coffee can be impacted by various imbalances in consumption, trade, and production. Coffee’s equilibrium for producers can only be found when the demand for a product meets their demand for marginal profit. If coffee producers do not react promptly to their supply and demand, the short fall during the production years 2005 and 2006 could reoccur. According to Richard Schlesinger (2005), “2005-2006 was short by eight to 10 million 60–kilogram bags of coffee, bringing total production down to 92 percent of what is annually consumed worldwide.” This short consumption was only heighted by the increase of demand from large corporations, such as Starbucks and Nestea, to feed their production lines. With a readily available product, the Food and Agriculture Organization of the United Nations predicted an annual rate of 1.3 percent (Economic and Social Development Department, 2003). However, the consumption of coffee in the United States based on the Economic and Social Development Department’s data in 2003, was, “Predicted to decline by 1.0 percent per year, mainly reflecting income and population growth in the region.” In addition, trade amongst the leading producers of coffee beans is predicted to see an annual increase of 0.2 percent during the projection period to eventually reach 92 million bags of coffee beans by 2010. With this increase in trade, consumer demand, and production, companies can often predict the shifts in supply and demand more accurately. An increase in specialty coffee stores worldwide proves that the coffee bean is a luxurious commodity. The demand of the coffee bean has steadily increased for over a decade. Comfort products with income elasticity have greater sales increases and decreases over the business cycle than necessity items, which have a less sensitive demand in regards to the economic cycle. A demand curve can shift from a variety of circumstance, including a change in income, the prices of related goods, tastes, population and demographics, expected future prices, etc. The income effect reflects the change in the quantity demanded of a product resulting from the effect of a change in the product’s price on consumer purchasing power. With an increase in price on coffee beans a substitution effects is created. On the other hand, the substitution effect refers to the change in the quantity demanded for a product that results from a change in price, making the product more or less expensive relative to another product. Substitutes are goods that can be used for the same purpose. “A substitute should be able to perform the functions of its principal” (Ukers, 1922). Regardless of that definition, coffee consumers insist coffee lacks a true substitute. In fact, according to coffee enthusiast Ukers (1922), “Good coffee, carefully roasted and properly brewed, produces a natural beverage, that for tonic effect, cannot be surpassed, even by its rivals, tea and cocoa.” Despite these comments made almost a century ago, the belief remains that coffee cannot be duplicated. There are several coffee alternatives and substitutes, such as sports and energy drinks, with lower/similar prices that are just as easily available on the market as coffee. An actual imitation coffee alternative exists and is designed to have the same taste and flavor of coffee without the tannic acids and caffeine of coffee. Another popular substitute for coffee is tea. There are many varieties and types of teas, including black, green, ginseng, herbal, and others, which continually flood the growing tea market. However, these alternative products generally do not affect the low price elasticity of coffee, because to real coffee drinkers, there simply is no substitute. Certain factors, for example, the uniqueness of the product or that it resides in a niche market that caters to only a specific percentage of the population, help contribute to the low price elasticity of coffee. Despite the fact that there is a whole sector of the population that does not drink coffee, the non-coffee drinkers do not have an effect on the coffee market because only people who use the product actually purchase the product. Many different regions and countries around the world are responsible for the production of the various types of coffee beans sold on the market. In recent years, weather patterns and climate conditions, such as heavy rain and crop flooding, have lowered production levels in many grow regions. As a result, low production levels have affected the overall supply, which has led to a fairly steady higher market price. The price of coffee fluctuates according to the overall production and supply of coffee beans available to be sold on the market. The price of the consumers’ daily coffee is directly impacted by the increase or decrease of the production, supply, and market price of the coffee beans. As previously mentioned, coffee is not a necessity because it is not a basic need required for a person’s survival. Coffee is actually considered a luxury item receives much criticism for its addictive ingredients. However, many people depend on coffee and its effects on a daily basis. Coffee is a good that has fairly low price elasticity due to the fact that people are not likely to diminish or halt consumption because of an increase in its price. Although not a necessity by definition, a percentage of people rely on coffee every morning to ignite their mornings; they need it and are willing to pay more for it if necessary. References Baumol, W. (2008). Economics: Principles and Policy, 11th Edition. Cangage Learning. Krugman, P. and Wells, R. (2009). Economics. Worth Publishing. Schlesinger, R. (2005). Today’s Imbalance in Global Supply and Demand. Roastmagazine.com. Retrieved from http://www.roastmagazine.com/backissues/septoct2005/coffeemarkets.html Schor, J. (2010). Plentitude: The New Economics of True Wealth. USA: Penguin Group. Ukers, W.H. (1922). All About Coffee. New York: The Tea and Coffee Trade Journal Company. Unknown Author (2003). Medium-Term Prospects for Agricultural Commodities. Economic and Social Development Department. Retrieved from http://www.fao.org/docrep/006/y5143e/y5143e0v.htm