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Essay on Analyzing Elasticity of Demand
Starbucks Coffee, Inc. operates in the coffee house industry. Starbucks is the dominant player in the industry, consistently posting higher profits than its competitors. For example, in the year 2000 Starbucks had a net profit of $94,564K as opposed to one of its competitors Dietrich’s Coffee with a net loss of $22,424K. If Starbucks decided to charge one dollar more on all of the products that they sell, would consumers keep frequenting Starbucks? This concept can be explained by price elasticity. Price elasticity refers to how a price change affects a company s change in sales and profit. It is the measure of the magnitude by which consumers change the quantity of some product they purchase in response to a change in the price of that product.
The more elastic demand is, the more reactive consumers are to any change in the price. If demand is inelastic, consumers are still relatively likely to purchase the product. Price elasticity of demand can be greater than 1, which makes the price elastic. When the elasticity of demand is less than 1 the price is said to be inelastic. It is useful to study perfectly elastic products and perfectly inelastic products to understand the concept of elasticity. When a product is perfectly elastic, any change in price will result in zero quantity demand. For example, wheat has perfectly elastic demand. There are hundreds of producers of wheat and they all of offer the same product. One small farmer cannot change the price of his product because he is just one of many wheat producers. If a farmer decides to charge even five cents more than anyone else, the consumers will shift their purchases away from this farmer and buy their wheat from some other producer......
