Table of Contents
Introduction
“Current Trends of Coffee Consumption” is an informative article that provides a critical analysis of coffee consumption based on the report by the National Coffee Association of the USA on National Coffee Drinking Trends. It states that the consumption patterns increased from 14% in 2007 to 17% in 2008(Abcarticledirectory, 2012). The article further explains that drinking gourmet coffee has become addictive in the USA and calls it a national pastime. The author of the article explains that the consumption trend has increased not only due to the marketing of Starbucks across the nation, but that there is an increased taste bud of a whole generation.
The general increased demand has been necessitated by intense marketing. Another factor fuelling the rise of gourmet coffee drinking and, subsequently, its demand in the market is the popularity of single serve coffee systems, which enhance the availability of gourmet coffee to many people in the morning. The article highlights that Senseo, Tassimo and Keurig coffee systems enhanced their sales and feature gourmet coffees in their coffee lines.
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Supply of Coffee
The increase in demand of gourmet coffee in the market, which resulted from active marketing and popularity of the brand, has led to a reduced supply of gourmet coffee in the market. The reduction of supply has, in turn, fuelled the rise of the product’s price. At the equilibrium price, the number of buyers who are willing and able to buy the goods is exactly equal to the number of sellers who are willing and able to produce coffee. For instance, at $100 for 500 grams of coffee, a buyer is willing to take two kilograms a month and a seller is willing to supply two kilograms at $ 100 of coffee per month.
In a situation where the demand remains the same, the market price will be constant ceteris Paribas. The stability of prices will prevail until a certain factor contributes to either a rise or a fall of the commodity’s market price.
Price Elasticity of Demand of Coffee
The price elasticity of demand is defined as a measure of responsiveness of quantity demanded to a change in price, ceteris Paribas (Mankiw, 2011).
The price elasticity of demand is normally denoted by Ed and defined as:
Proportionate change in quantity demanded
Ed = ------------------------------------------------------------------------
proportionate change in price
Following the law of demand, the quantity of a commodity demanded decreases when the price increases and this ratio is normally negative; however, absolute number is used instead for Ed.
Mathematically, price elasticity of demand is defined as shown below:
Q2 - Q1
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(Q1 + Q2) / 2
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P2 - P1
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(P1 + P2) / 2
Where
Q1 = Initial quantity of the commodity
Q2 = Final quantity of the commodity
P1 = Initial price of the commodity
P2 = Final price of the commodity
The price elasticity of coffee in the article discussed is elastic; this happens because a small change of price results into a bigger change in quantity demanded. This situation is justified by the fact that coffee has a close substitute, which is tea.
The demanded quantity of coffee is relatively elastic, whichmeans that a slight price change will result into an even larger change in quantity demanded (Mankiw, 2011). The case of Ed = infinity is known as perfectly elastic. For products having a high price elasticity of demand, like in the case of coffee, a price increase will result in a revenue decrease – this is the revenue lost as a result of decreased quantity sold, which is more than the revenue gained from increase in price.