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Economic100 Analysis - Article Example

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Coffee price hike sours brew Introduction Coffee has nowadays become one of the essential consumer good items. It is used by people around the world. However, it’s alarmingly distressing that the prices of a brew are now going up. The article under consideration implies that the average price of a cup of coffee has steadily been increasing, given the hike in its raw material, coffee beans…
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Economic100 Article Analysis
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Download file to see previous pages The article sheds light on the increasing costs of business, implying that not only the apparent rise in coffee beans but also utilities, rent etc attribute to the hike in the prices. Keeping this in mind, the climate of business is not a favorable one, and this may have short term to middle term implications for other segments in the market as well. The objective of this analysis is to apply relevant economic concepts to this article and understand the fundamentals at work here. Economic Concepts There are a few key economic concepts which can be applied to explain the whole of things. Some of them include demand pull inflation, increase in aggregate demand, porter’s five forces etc. Particular focus will be laid on the implications of the existing context, given it persists and how it will hamper longer terms sales etc. Analysis The first economic concept which the article lays emphasis on is the fact that there has been an overall increase in the demand for coffee around the world. We’ve seen that over the course of the last 3 decades, a lot of globalization has taken place, and in the process, there has been a lot of transference of good and services across borders. Coffee is one of those items which has found a market for itself wherever it has gone. Growing economies such as China and India have shown great promise in terms of demand for the products and this has only fueled the prices in an upward direction. When aggregate demand increases, it has to be followed by an increase in the aggregate supply in an equal magnitude otherwise the result is inflationary pressures in the economy. In the case of coffee, the demand has increased, but the supply has not been able to cope with the demand. Hence the result is demand pull inflation. As is seen in the diagram, increases in the aggregate demand will cause a movement along the curve, but if there are other variables altering, then this can trigger a shift of the curve all together. The inflation we refer to over here doesn’t imply that the whole economy is heating up, but rather just the coffee segment. However, inflation is something that cannot be sustained in this segment. The reason can be explained by Porter’s Five Force model. One of the key pillars of that model is the threat of a substitute. In the case of coffee, there are many substitutes readily available in the market. They can include tea, lattes, cappuccinos etc. The point is that price fluctuations are not sustainable in an industry such as this one. Moreover, the price sensitivity of this product is extremely high. Therefore, even the slightest fluctuations in price could trigger a decrease in supply for this product. Now the real debate starts here. The problem in prices arose due to an uncoordinated demand. However, what’s the trade-off between increasing prices and increasing consumer base? The answer to this question lies in the fact that no production line would like to see a decline in the demand for that particular good, however, it must be able to sustain the demand without increasing prices. If prices are pulled up due to these pressures, it implies that the demand cannot be sustained and eventually, the higher prices will lead to a decline in the demand and equilibrium will once again be attained on the previous level. When that happens, this cycle will repeat ...Download file to see next pagesRead More
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