Coffee Price Hike Sours Brew - Article Example

?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. Although the increase is somewhere around 0.25 cents per cup and may seem inconsequential, the problem arises with the readily available substitutes of coffee. The nature of the product is such that it is extremely price sensitive and even moderate fluctuations in prices may trigger people opting for the next best thing. 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 itself. Hence the idea should be to retain the same demand with an increase in supply rather than an increase in price levels. A key factor to take note of in the article was that coffee itself only comprised a small cost in the price of a cup. Other factors such as rents, utilities, packaging etc also counted towards the final price of the coffee and apparently they had bigger stakes than the coffee beans themselves. The article specified that the cost of doing business was steadily rising and that is why the price of even coffee was not spared. Although we had genuinely discussed inflation with regards to coffee prices, this factor implies that the economy itself is heating up and the result is that the prices of various other goods and services are sky rocketing. Inflation will have a lot of implications for the economic system as well as the business cycle as it will lead to an increase in interest rates, which in turn will lead to a decline in GDP growth. Again, both these variables are relative to each other, and their magnitude is solely dependent on the interest rate movement. The key is to strike a balance between the two so that the economy does not witness any hampered growth. Putting aside the increase in prices, the article stresses that international coffee outlets are expected to witness nominal increases in prices. However, there are disparities within regions in the same country. At this point, its clear that it depends on the willingness of the consumer to spend an extra bit for the same good. As we have already agreed earlier, the rise in price is not very significant, and most people will probably let it fly. But the point is that it must be kept under check other wise the price spiral can carry the price forward. Conclusion The rise in the price of coffee can be attributed to various reasons including: A rise in the demand for coffee globally, triggering demand-pull inflation. A rise in the cost of doing business. The implications for the industry can be somewhat detrimental if not handled with the proper care. It must be kept in mind that the item is extremely price sensitive and hence there is a high probability that the consumers may opt to go for readily available substitutes in the market. Global expansion has been a core reason for the increase in prices, and this can also be a probable solution. Increasing the global supply of coffee is how this issue can be resolved fundamentally. However, the issue of rising costs for doing business is alarming since that implies that the economy is reaching its boiling point. In order to avert such a disaster, the economic system needs to be scrutinized and the key steps need to be taken to address the issue. References Anonymous. March 21, 2011. “Coffee price hike sours brew”. Accessed on April 09, 2011. http://www.news.com.au/money/coffee-price-hike-sours-brew/story-e6frfmci-1226025395458 Michael Pollick, January 2011. “What is Demand-Pull Inflation”. Accessed on April 09, 2011. http://www.wisegeek.com/what-is-demand-pull-inflation.htm Read More