Starbucks Macroeconomic Analysis: Supply, Demand, Elasticity & More - Research Paper

Introduction

Starbucks primarily focuses on marketing and serving coffee and other beverages to its customers globally. A macroeconomic analysis of Starbucks includes an assessment of the supply and demand factors associated with its products and services. Besides, the price elasticity of demand feature provides comprehension on the pricing and other factors related to competition, such as the availability of substitutes.

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Some of the essential elements in a market economy include supply and demand. Supply emphasizes the availability of products for sale while the demand concentrates on the desire and ability of an individual to but the supplied products or services. Therefore, looking at the Starbucks scenario, supply tends to incline on the presence of coffee on the market with these provided for its acquisition to meet the demand needs of its clients. In cases where the demand for coffee is lower compared to the supply, the equilibrium price drops. On the contrary, when the demand is higher than the supply, the equilibrium price increases. The graph below shows some changes in the supply and demand for a coffee supplied by Starbucks.

An increase in the price of Starbucks coffee from P0(1.50) to P1(2.50) leads to a shift in demand with a decline from q2(1000 cups) to q1(800 cups). In the same event, the supply of coffee will also increase. Over the years, Starbucks has increased the prices of its coffee drastically. For example, Morris (2018) reveals that in three years, Starbucks increased the prices of its coffee three times. The company, as of 2018, had increased the price of the coffee product with 10 to 20 cents depending on the location. Therefore, following the supply and demand forces, such a move would affect the demand for the coffee while other factors, such as income levels, are kept constant.

Defining price elasticity of demand, Fibich et al. (2005) looked at it as the percentage change in the demanded quantity of a product or a service based on the percent change in their prices. As an economic variable, the changes based on the pricing and demand feature. For example, a change in the quantity of Starbucks coffee demanded would increase say with a 1 percent change in price. Therefore, studying the price elasticity of demand for Starbucks involves examining their elements of demand and pricing. As a means of influencing competition, the company may decide to lower the prices of its product, which may lead to an increase in demand. Besides, to remain relevant and competitive, other companies offering similar products in the market will reduce their prices for coffee. The availability of substitutes, however, may lead to higher elasticity of demand compared to when they are absent in the market. Thus, since the level of income dictates the consumer responsiveness to price changes, a higher disposable income would lead to lower elasticity of Starbucks coffee and other products demand as consumers may have the ability to exercise their purchase even with a change in price. The presence of substitutes would thus lower price changes decreasing the price elasticity.

Supply and demand are important elements of pricing for Starbucks. Therefore, they are essential in examining price elasticity of demand, which is an important part of the pricing decisions of Starbuck products in various markets.

Fibich, G., Gavious, A., & Lowengart, O. (2005). The Dynamics of Price Elasticity of Demand in the Presence of Reference Price Effects. Journal of the Academy of Marketing Science, 33(1), 66-78. doi:10.1177/0092070304267108

Morris, C. (2018, June 7). Starbucks Quietly Raises Prices'Again. Retrieved from https://fortune.com/2018/06/07/starbucks-raises-coffee-prices-2018/