Economic Analysis

Chapter 3, Question 14

Demand and supply are said to be in equilibrium when producers do not have an incentive to change their supply, and consumers do not have any incentive to move their demand schedules. However, upward movements in demand could lead to a relatively shortened supply and creates a tendency of upward price movements (Sloman, John & Sutcliff, p. 43). Therefore, price would move to a level where producers, in short term, are able to meet the risen demand. When more producers follow the Starbucks suit, that is, introducing their premium brands, then the supply would eventually increase and form a new equilibrium.

When there is excess demand for coffee (demand is greater than supply), coffee producers like Starbuck will be able to increase their prices. If there is excess supply (supply is greater than demand), some coffee will remain unsold. Producers then have a choice. Either they can offer coffee for sale at the existing price where they will sell everything offered. If all producers choose not to lower their prices, there is likely to be even greater pressure to reduce prices in the future because there will be unsold stocks of coffee overhanging the market. Therefore when there is excess demand, prices will be driven upwards whilst prices will fall if there is excess supply (Sloman, John & Sutcliff, p. 63)

Although Starbucks is known for its various types of drinks and food, its major revenue comes from its coffee sales, most of which is U.S. generated. Starbuck's has expanded into the global market and needs to generate greater revenue outside of Unites States in order to be less affected if negative economic conditions or increasing levels of competition were to become present in the United States.

A critical price determinant for coffee sales is the supply ...