Questions to Consider:

Starbucks Raises Its Price 'For Coffee by 10 Cents
By a WALL STREET JOURNAL Staff Reporter
May 12, 1999

SEATTLE-A cup of Starbucks coffee will cost about a dime more starting today.

Starbucks Corp., whose coffee already is among the priciest, cited higher labor and space costs for the increase, which takes effect at its 2,000 coffee shops across North America. Prices may vary slightly depending on the market, a spokesman said.

The cost of bagged whole beans won't increase, partly because green-coffee prices have been low recently and because whole-bean sales aren't labor-intensive.

"Our efforts to recruit top-quality workers was a key factor in driving our decision," the spokesman said. He acknowledged that in some cases Starbucks has had to raise wages to retain help.

Starbucks last raised retail prices two years ago. At that time there was little sales loss, the company said. While a large coffee can cost as much as $2.50, John S. Glass, analyst at BT Alex. Brown, estimated the increase could add 3% to sales at stores open at least one year. He called demand for a cup of Starbucks "fairly inelastic" to cost.

Questions to consider:

1. Using supply and demand analysis, would "higher labor and space costs" tend to result in higher prices for a cup of coffee, all else equal? for a bag of whole coffee beans?
2. Using supply and demand analysis, would lower "green-coffee prices" tend to result in lower prices for a bag of whole coffee beans, all else equal? for a cup of coffee?
3. Why does labor-intensity determine whether the price rises (cup of coffee) or remains constant (bag of beans)?
4. What does John S. Glass, analyst at BT Alex. Brown, mean when he called the "demand for a cup of Starbucks 'fairly inelastic' to cost."
5. What evidence in the article confirms that the demand for coffee is "fairly inelastic"?
6. What is your best estimate of the price elasticity of demand for a cup of coffee at Starbucks?