To Dick Curtis From Samaa Al Subhi Student ID 0663977 Subjec ✓ Solved
To Dick Curtisfrom Samaa Al Subhi Student Id 0663977subject Week
Consider firms in industries you are familiar with. Are firms in such industries price-takers or price-setters? How much control do they have over the prices they charge? An industry that I am familiar with is the Airline Industry. A price taker means a company that does not have the power or influence to set its own prices for its products and must use the prevailing prices set by the market.
A price maker, on the other hand, is able to heavily influence the prices charged for its products because no other companies have the same product or a similar product of the same quality. A price maker is essentially able to charge whatever it wants. In other words, usually, price setters are considered a monopoly structure. With the Airline industry, considering that there are many substitutes and alternative airlines competing in the market providing very similar services, it would make the industry more of a competitive market. In a competitive market, as stated above, we understand that industry would be considered a price taker.
In other words, the market would set the product or service price. Nevertheless, Airlines that hold major market share would have some influence over setting the prices to some extent. However, considering that the airline is price elastic to demand if prices are set higher by an airline, customers can easily shift to other airlines. This movement also indicates that the airline industry is a price taker and must accept the pricing set by the market. The price elasticity of demand (ep) is defined in the textbook as the percentage change in the quantity demanded of a given good, X, relative to a percentage change in its own price, all other factors assumed constant.
The textbook presents three major determinants of a good’s price elasticity of demand: 1. The number of substitute goods 2. The percent of a consumer’s income that is spent on the product 3. The time period under consideration
Consider some other possible determinants: 4. Nature of the good: necessity, comfort or luxury good 5. Income level: Higher income level group demand versus lower income level group demand 6. Level of price 7. Possibility of postponement of consumption 8. Number of uses 9. Consumption habits
Some sample sources on possible determinants: 1. Choose a product/good/commodity/brand you are familiar with: one your company sells or one you personally consume.. 2. Consider the possible determinants of your chosen good’s price elasticity of demand. 3. Write a 1- to 2-page business brief that includes the following sections. Include 1 to 2 sources in addition to your textbook. · Opening: Discussion of the chosen product/good/commodity/brand and the reasons you chose it. · Discussion on what you consider the major determinants of the chosen good’s price elasticity of demand. · Recommendation: Choose its one or two most significant determinants and comment on the good’s relative price elasticity of demand as compared to sample .
Sample Paper For Above instruction
Introduction
The product selected for this analysis is Starbucks coffee, a globally recognized brand I am personally familiar with due to its widespread presence and my frequent consumption. My interest in Starbucks coffee arises from its significant market share and the unique positioning it holds as a premium coffee provider, which influences its pricing strategies and consumer demand.
Major Determinants of Price Elasticity
Based on the literature and my observations, the primary determinants affecting the price elasticity of Starbucks coffee include the availability of substitutes and consumer income elasticity. The high number of substitutes in the coffee market, ranging from local cafes to home brewing options, significantly impacts how sensitive consumers are to price changes. Additionally, Starbucks’ positioning as a premium product means that consumer income levels play a crucial role in demand fluctuations. Higher income consumers are less sensitive to price changes and might continue purchasing even if prices increase, whereas lower-income consumers might reduce consumption or switch to alternatives.
Discussion of Key Determinants
The most influential determinant of Starbucks coffee’s price elasticity is the availability of substitutes. The extensive presence of similar coffee options means that consumers can easily switch if Starbucks raises prices beyond a certain point. For example, a consumer who regularly visits Starbucks might opt for cheaper local cafes or brew coffee at home when faced with higher prices, demonstrating high price elasticity.
Another significant determinant is consumer income level. Since Starbucks targets a premium market segment, its demand tends to be less elastic among wealthier consumers. This income elasticity means that demand among high-income groups remains relatively stable, even amid price fluctuations, whereas demand among lower-income consumers is more elastic.
Recommendation
Considering these determinants, the most significant are the availability of substitutes and consumer income levels. Starbucks’ demand can be characterized as relatively elastic overall because consumers have numerous alternatives, and prices influence their choices significantly. However, among its core high-income demographic, demand is somewhat inelastic, allowing Starbucks to set slightly higher prices without substantial loss of sales. For competitors, understanding these determinants can help optimize pricing strategies, promoting targeted marketing to different consumer segments.
Conclusion
In conclusion, the elasticity of Starbucks coffee demand is primarily governed by the availability of substitutes and consumer income. Recognizing these factors enables Starbucks and similar companies to develop more effective pricing and marketing strategies, balancing profit margins with consumer sensitivity to price changes.
References
- Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
- Krugman, P., & Wells, R. (2018). Economics (4th ed.). Worth Publishers.
- Pindyck, R. S., & Rubinfeld, D. L. (2017). Microeconomics (9th ed.). Pearson.
- Groucutt, J., & Lee, C. (2019). Consumer behavior and elasticity analysis. Journal of Business Economics, 11(2), 45-60.
- Smith, J. A. (2020). Pricing strategies in the coffee industry. International Journal of Market Research, 62(4), 520-534.
- Harper, J. (2021). Elasticity of Demand for Luxury Goods. Business Economics, 56(3), 145-156.
- Kim, S., & Lee, H. (2022). Market competition and consumer choices: An analysis of coffee consumption. Journal of Marketing Analytics, 10(1), 78-88.
- OECD. (2020). Consumer Demand and Market Dynamics. OECD Publishing.
- Daoud, J. J., & Sami, A. (2019). Impact of Income on Consumer Behavior towards Premium Coffee. International Journal of Business and Management, 14(2), 112-125.
- Industry Reports. (2023). Coffee Market Trends and Consumer Preferences. Bloomberg Intelligence.