Essay on Microeconomics and Starbucks

2723 Words Jul 7th, 2009 11 Pages
Topic: An examination into the rise and fall of Starbucks Coffee Company and its relationship to certain microeconomic principles.

Thesis: While Starbucks has been an industry leader in the specialty coffee market, rapid overexpansion and current economic conditions have caused it to lose its market dominance. Is the company strong enough to recover?

I. The origins of Starbucks

A. 1971 Beginnings

B. Starbucks goes public in 1992

C. Rapid expansion from mid-1990s to mid-2000s

II. Starbucks provides microeconomic principles

A. Supply and demand

1. Few stores and high demand

2. Oversaturation of stores and low demand

B. Price elasticity

1. The good ol’ days

2. All good things
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However, fast growth led to what CEO Howard Schultz termed the “watering down” of the Starbucks experience (Creuder). What started as a 4-store company when it went public in 1992, now had some neighborhoods with a Starbucks on every block or two.

The chart below shows the relationship of supply and demand for Starbucks coffee. That is in the three year period from 2006 – 2008, as the number of stores (supply) increased, the demand (evidenced by percent growth) decreased.


Source: Table 1 data

Price Elasticity

The price elasticity of demand measures the responsiveness of the quantity demanded of a commodity to changes in its price (Miller, 528). Some goods have a negative relationship between changes in price and changes in total revenues (elastic). Some goods do not experience any change in total revenues if there is a change in price (unit elastic). Others have a positive relationship between changes in price and changes in total revenue (inelastic).

For years Starbucks appeared to be price inelastic. The company had price increases in 2000, 2004, 2006 and 2007 but continued to see revenues climb (Kirchoff and Petrecca). In fact, the company was used as an example by many economics professors to illustrate this principle.

In 2008, it appeared that $4 was the price at which demand became elastic. In July of

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