Microeconomics of Starbucks

 

Starbucks is a coffee shop that place in Seattle’s Pike Place Market in 1971, it was the first Starbucks shop. After 11 years which is 1982 Howard Schultz bought Starbucks after he tried his first cup of drinks in Starbucks which is Sumatra. (Anon., 2013) The products sell in Starbucks are food and beverage such as coffee, chocolate blended, muffins and many more. In Starbucks, Howard Schultz is a director of retail operations and marketing.  When Howard Schultz take over the coffee shop, it has expanded sharply in year of 1982 to 2008 in worldwide. According to the large expansions, location is important to each of the outlets however they usually choose the location is no competitors around. Based on the research from Jannarone, in Unites States only 23% of Starbucks outlets areas have other competitors such as McCafe, they are approximately few miles away from Starbucks. (Jannarone, 2010) Therefore, customers will not switch easily to other alternatives besides Starbucks.

When recession happens at the beginning of 2008, Starbucks’ revenue has decline about 17million which is 9% decrease of the sales. When the recession occurs in the market, consumer of Starbucks tend to assume the income are likely to fall but Starbucks does not lower the price of its goods because they want to remain the premium brand and the quality of the goods. (Anon., 2010)  (Cain, 2009) Due to this, some customer could not afford or will cut back on the goods of Starbucks while their income does not increase so the demand curve shifts to leftward. Taste and preferences of Starbucks are depending on the customer attitude. However, Starbucks will try to influence customer taste and preference for such nice drinks and foods by using advertisement. There are many customer are prefer Starbucks because the foods and drinks are tasty as compare to competitors such as Mc Cafe and some customer would like to do projects or spent time at Starbucks due to the comfort environment. Moreover, the advertisement with beautiful pictures about Starbucks’ good will attract the customer who never try Starbucks before to have a try. This shows a positive improvement in taste and preference so the demand curve will shifts to the right with more products are being sold where the price of Starbucks does not change.  Price expectation will affect the demand curve in increase the quantity demanded. Customers assume future price of Starbucks will rise, thus customers are likely to bring consumption forward and purchase now instead after the price has rise. Consequently, the current demand will increase and shifts to right whereas the future demand will shift to left. (Mun, 2011)

 
 
Figure 1.1

                       

Figure 1.2
In figure 1.1 and 1.2 shows the movement along the demand curve with no price is changing whereas the income, taste and preference and expected value has change.

 

         
         A change in supply indicates the entire supply curves shift. It change when the cost of production increase so the quantity supply of good will decrease which mean Starbucks not willing to supply more goods when the price of production is higher than the previous price because the profit is lesser therefore the supply curve will shift to the left. Besides that, expected future price could change the supply curve in way of when the future price of Starbucks’ good will rise, they will not produce more goods at current price. This indicates that they want to make more profit in the future so the current supply curve shifts to the left and the quantity supply will decrease. Technological improvement permits production of a unit of output with fewer resources. With an advance in technology will lower the cost of production and increase the goods of Starbucks. Thus, advance technology is useful to produce more so the supply curve shifts to right.  (Begg, 2009) When there is an expansion occur in Starbucks, market demand and supply curve will be affected in way of either shifting leftward or rightward. In this situation the curve shift rightward illustrates an increase in supply. It means when Starbucks shop open more and more at different area, the supply curve of Starbucks goods increase by following the needs of consumer in the Starbucks shop. Consequently, the price of Starbucks would decrease due to the increasing of supply and cause the demand increase.  (Anon., 2010)

 



Figure 1.3

Figure 1.3 shows the movement along the supply curve with no price is change whereas the cost of production, expected future price and technology has change.

 

          Starbucks coffee has an elastic demand, some may be addicted to coffee but Starbucks is luxury goods not a necessity goods. The demand for Starbucks coffee will decrease if prices increase because of the huge market of competitor we have that offers the same good and at a cheaper price. For example, McCafe is offering coffee at three to four dollars less than the coffee at Starbucks. Now with the value of Malaysia ringgit has fallen, the incomes of consumers have diminished. As income fall, the demand of normal goods will decrease and will cause a shift in the demand curve. Starbucks is measured on luxurious good both high quality and high price.  (Jackson, 2012) Income elasticity impacts change in demand curve. As incomes increase, some goods for some people will become inferior goods. This just means that as income increases, these people consume more on this good. Consumers will switch into a more prestigious good the more money they make. So if Starbucks coffee price is high, customer that make enough money does not mind the high luxury price and will still consume Starbucks’ good.

 

 

 

Figure 1.4

Figure 1.4 shows relatively elastic demand and relatively inelastic demand.

          Tax incidence is a tax that division between buyers and sellers, it is also related to the price elasticity of demand and supply. The price of elastic demand of Starbucks is relatively elastic and the elastic of supply is relatively inelastic which mean the producer pay more than consumer. Therefore, the tax has imposed in between Starbucks and consumer who buy the food and drinks and Starbucks bear more of the tax. If the price of Starbucks does not charge tax by government, the demand will increase, whereas if the price of Starbucks includes tax then demand will be influence in way of decrease.  (Sloman, 2012)

Figure 1.5

Figure 1.5 shows the producers pay the larger part of tax incidence more where the consumer pays a small part of tax incidence.  

 

          Starbucks operate in a monopolistic competition structure. There are 4 characteristic found in monopolistic competition which is there are many small firms in the market, it is a freedom of entry, differentiated product and the demand curve faced by Starbucks is downward slopping but it is relatively elastic. Starbucks has successful create sense of brand loyalty with loyal customer even though the inflation happen in their prices.  Starbucks’ Coffee is a fairly homogeneous item which Starbucks has been able to set their standards of portraying a luxury lifestyle.  (Pitek, 2009) Starbucks operates in a monopolistic competition market structure in which they are able to handle over their inflated prices.  They have been able to generate a standard for their coffee and in which they require their customer base to be exaggerated prices for a cup of their various taste of drinks.  By using of the Starbucks logo, quality, and trademarks, they differentiate their coffees from the competitors such as McCafe. Starbucks state itself on being totally different from any other coffee shop competitors, this is the reason why Starbucks has become so successful.  Starbucks has a strategy to focus on their competitiveness to differentiate themselves has made Starbucks into a coffee powerhouse for example increase the price without customer switch to competitors which are hard for competitors to imitate.Starbucks is not the only coffee shop in the market, others like McCafe, Coffee Bean have an identical item with similar tastes as the Starbucks drinks.  There are other homogenous coffee shops in the market, but Starbucks’ loyal customers believe that the better quality, taste, environment hand aroma cannot be found from any other coffee shop. (Rana, 2012)

 References:

Anon., 2010. UK Essays. [Online]
Available at: http://www.ukessays.com/essays/economics/economic-issues-of-starbucks-economics-essay.php

Anon., 2013. Starbucks. [Online]
Available at: http://www.starbucks.com.my/about-us/our-heritage

Begg, D., 2009. economics for business. 3rd ed. Berkshire: McGraw Hill Education.

Cain, M. C., 2009. The New York Times. [Online]
Available at: http://www.nytimes.com/2009/08/21/business/21sbux.html?_r=0
[Accessed 20 August 2009].

Jackson, J., 2012. Microeconomics. 9th ed. Australia: McGraw Hill.

Jannarone, J., 2010. Growth of Starbucks. The Stars Could Be Aligned for Growth at Starbucks.

Mun, J. S., 2011. Theory of demand. [Online]
Available at: http://reflectingproject.blogspot.com/search?q=price+elasticity+on+starbucks
[Accessed 4 March 2011].

Pitek, M., 2009. Economics and Institution, s.l.: s.n.

Rana, A., 2012. Microeconomics - A Beginner's Journey. [Online]
Available at: http://microeconomicswithanil.blogspot.com/2012/12/compteting-as-starbucks.html
[Accessed 9 December 2012].

Sloman, J., 2012. Economics. 8th ed. Edinburgh: Pearson Education Limited.