n luxurious good both high quality and price".   With reference to the text above and the concept of income elasticity, draw a diagram and explain what would happen to the demand for Starbucks coffee as income increases. 3. With the aid of a diagram, identify and explain the determinants of supply that would result in an increase and decrease in supply of Starbucks co

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter3: Demand Analysis
Section: Chapter Questions
Problem 13E
icon
Related questions
Question

1. Identify and explain the type of price elasticity for the demand of Starbucks coffee with the aid of a diagram.

2. "Starbucks is measured on luxurious good both high quality and price".  
With reference to the text above and the concept of income elasticity, draw a diagram and explain what would happen to the demand for Starbucks coffee as income increases.

3. With the aid of a diagram, identify and explain the determinants of supply that would result in an increase and decrease in supply of Starbucks coffee.

 

(30 Marks)
MICROECONOMICS: CASE STUDY
An Overview of the Starbucks Pricing Strategy
While cutting prices is widely accepted as the best way to keep customers during tough times, the practice
is rarely based on a deeper analysis or testing of an actual customer base. In Starbucks' case, price increases
throughout the company's history have already deterred the most price sensitive customers, leaving a loyal,
higher-income consumer base that perceives these coffee beverages as an affordable luxury. In order to
compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to
maximize profits from these price insensitive customers who now depend on their strong gourmet coffee.
Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to separate itself
from the pack and reinforce the premium image of their brand and products. Since their loyal following isn't
especially price sensitive, a small price increase of Starbucks coffee can have a huge positive impact on their
margins without decreasing demand for beverages. In addition, only certain regions are targeted for each
price increase, and prices vary across the U.S. depending on the current markets in those areas (the most
recent hike affects the Northeast and Sunbelt regions, but Florida and California prices remain the same.
Starbucks is measured on luxurious good both high quality and high price.
They also apply price increases to specific drinks and sizes rather than the whole lot. By raising the price of
the tall size brewed coffee exclusively, Starbucks is able to capture consumer surplus from the customers
who find more value in upgrading to grande after witnessing the price of a small drip with tax climb over the
$2 mark. By versioning the product in this way, the company can enjoy a slightly higher margin from these
customers who were persuaded by the price hike to purchase larger sizes.
Source : https://www.priceintelligently.com/blog/bid/184451/how-starbucks-uses-pricing-strategy-for-
profit-maximization
Transcribed Image Text:(30 Marks) MICROECONOMICS: CASE STUDY An Overview of the Starbucks Pricing Strategy While cutting prices is widely accepted as the best way to keep customers during tough times, the practice is rarely based on a deeper analysis or testing of an actual customer base. In Starbucks' case, price increases throughout the company's history have already deterred the most price sensitive customers, leaving a loyal, higher-income consumer base that perceives these coffee beverages as an affordable luxury. In order to compensate for the customers lost to cheaper alternatives like Dunkin Donuts, Starbucks raises prices to maximize profits from these price insensitive customers who now depend on their strong gourmet coffee. Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to separate itself from the pack and reinforce the premium image of their brand and products. Since their loyal following isn't especially price sensitive, a small price increase of Starbucks coffee can have a huge positive impact on their margins without decreasing demand for beverages. In addition, only certain regions are targeted for each price increase, and prices vary across the U.S. depending on the current markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but Florida and California prices remain the same. Starbucks is measured on luxurious good both high quality and high price. They also apply price increases to specific drinks and sizes rather than the whole lot. By raising the price of the tall size brewed coffee exclusively, Starbucks is able to capture consumer surplus from the customers who find more value in upgrading to grande after witnessing the price of a small drip with tax climb over the $2 mark. By versioning the product in this way, the company can enjoy a slightly higher margin from these customers who were persuaded by the price hike to purchase larger sizes. Source : https://www.priceintelligently.com/blog/bid/184451/how-starbucks-uses-pricing-strategy-for- profit-maximization
Expert Solution
steps

Step by step

Solved in 4 steps with 3 images

Blurred answer
Knowledge Booster
Elasticity of demand
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Managerial Economics: Applications, Strategies an…
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning