This has led some customers to say they will start drinking less coffee than they used to. Some restaurant owners are trying desperately to avoid passing the cost on to customers, often at a price for their employees.
"My staff is unfortunately feeling the pinch, because I'm cutting back on their hours and I'm working more hours myself to make up the profitability," said restaurant owner Brad Kent.
There are many reasons for the price hike for coffee: Wet weather damaged crops in Columbia and Indonesia; booming economies mean millions of Indians, Chinese and Brazilians now enjoy the coffee habit; and millions of investors are trying to profit off the rising market.
"The commodities market is just like a stock in the stock market, and as investors go in and purchase more of that stock, the price subsequently will rise," said Salzer.
The rise in coffee costs will have an impact on the way we all dine, too.
"The days of the 25-cent bottomless cup are long gone," said Jay Lijewski, L.A. general manager of Intelligensia Coffee.
Intelligentsia Coffee wants customers to view good coffee like fine wine.
"I don't expect it to ever be below $2.00 a pound," Lijewski said."It could potentially rise to 5 (dollars per pound) or more."
That could have customers steaming.
© 2011 CBS Interactive Inc.. All Rights Reserved.
Commentary:
This article talks about the reason behind the increase in coffee prices in many famous coffee shops such as Dunkin’ Doughnuts and how that has affected the consumers’ demand. It also discusses the effect of the rapidly rising price of coffee beans on the coffee shop owners, their employees, the coffee beans suppliers and on the coffee consumers as well as the reasons behind that increase. The article includes the law of demand as well as price elasticity of demand (PED).
Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period. The law of Demand states that if the price of a product falls, the quantity demanded of the product will usually increase and vice versa. It is also known that a change in the price of a good itself leads to a movement along the existing demand curve. This means that when the price of coffee increases the double in some cases demand will eventually decrease.
Price elasticity of demand or PED is a measure of how much the quantity demanded of a product changes when there is a change in the price of the product. In this case this formula is applicable because as seen in Graph1 the price of coffee (the product) changes which affects the demand negatively; “This has led some customers to say they will start drinking less coffee than they used to.”
When an increase takes place in the cost of factors of production such as coffee beans that means the producers have to options; either supply less and lose costumers or increase the price and also lose customers. It is a dilemma that these business owners had to go through because of many reasons: a. the wet weather that damages the crops in Indonesia and Columbia and as the quantity of a product decreases it creates a new equilibrium with the price where the demand and supply curves meet at a new point usually with the price increasing (Graph2). Other reasons include the better financial states of countries like India, China and Brazil; which means them also starting to demand luxuries such as coffee, which means an increase in the investors that are trying to make profit therefore a higher competition in the market and a higher cost of production. The problem is everyone was affected by the price change; whether the business owners as they have to pay more for, the employees face either more working hours or a decrease in wages and the consumers have to deal with a higher place for their daily cup of coffee.
In the short run business owners could try avoiding increasing the price but eventually they will have to deal with it because by the looks of things the price of the beans will keep getting higher and they will have no other option. Some firms with huge popularity already resorted to this solution such as Starbucks where they raised the price by 12% and Folgers where they went up by 10% on the long run as well this increase isn’t really going to affect their profits unless the prices boom drastically because although coffee is a luxury many people think of it as a necessity. Caffeine is also an addictive substance, meaning that many people could actually be addicted to stop which would minimize the size of the negative impact on the demand curve. The assumption that the price will keep increasing is what this article is based on; and if that idea is refuted then it is baseless, it also fails to take customers opinions into consideration and seems to focus on the supplier’s point of view. The only people that have a real problem to deal with because of this issue are the business owners and their employees other than that, most people wouldn’t give up their caffeine fix as long as the increase isn’t drastic. In general, the arguments built in the article where not biased, they used facts and statistics as well as valued judgments from experts; mostly coffee business owners. The economic theory in this case completely corresponds with the situation at hand and therefore this article’s argument is valid.
Graph1 Graph2
P – Original price P – Original Price
P1 – Increase in price Q – Original Quantity
Q – Original quantity demanded EQ – Original Equilibrium
Q1 – Quantity demanded after P1 – Price after change in supply
increase in price. Q1 – Quantity after change in supply
EQ1 – New equilibrium after change
in supply
Bibliography:
-
Whitaker, Bill. "Price of Coffee Heats up - CBS News." Breaking News Headlines: Business, Entertainment & World News - CBS News. CBS News, 26 Aug. 2011. Web. 05 Jan. 2012. <http://www.cbsnews.com/2102-18563_162-20057625.html?tag=contentMain;contentBody>.