AP Economics A3
15 December 2015
Economics and a Cup of Coffee
Coffee’s addictive nature has ensnared thousands of consumers to commit a good portion of their income to the purchase of coffee beverages. Many individuals rely on coffee to get them through their busiest days, while others view coffee as a delicious beverage to sip while conversing with friends. Although it may seem like coffee is a continually growing industry, coffee prices fluctuate rather often due to changes supply and demand.
Coffee is the second most traded product -- right behind oil -- and therefore creates 100 millions jobs worldwide. These jobs rely on the coffee bean which is supplied by many countries along the equator. About 20 million farmers make a living off of growing coffee beans. If the world were to experience a decrease demand in coffee, unemployment would greatly increase because of the vastness of the coffee market. However, the coffee industry is growing, therefore more jobs are continually being created (Economics).
The coffee industry works in the monopolistic competition structure. There are many companies that sell coffee drinks, however, each firm slightly differentiates their product. Nonprice competition drives the demand for coffee. Advertisements such as commercials and billboards try to promote one brand of coffee over another to increase their consumers and thus their revenue. Here is an example of nonprice competition in the coffee industry (Starbucks). These advertisements increase individual demand, which increases the individual firm’s price, however, it has no impact on the industry price. The industry price is derived from the market demand and supply.
Weather is one of the main factors that influences the coffee industry’s demand. During the winter, demand for coffee soars as the cold weather drives people into crowded coffee shops to purchase a drink that will warm them up. However, when summer arrives, consumers will substitute warm coffee drinks with cool beverages like soda or lemonade and demand for coffee will fall. Some coffee firms have tried to address this issue by promoting iced coffee -- like in the Starbucks advertisement -- yet, coffee’s demand still fluctuates throughout the seasons. These fluctuations cause coffee prices to rise in the winter and fall in the summer (Brewed).
Like weather influences demand, tax influences the supply of coffee. Next to cigarettes and alcohol, coffee is one of the highest taxed products in the United States. Recently, the tax on coffee went up 10% which caused the supply of coffee to decrease, thus increasing the market price of coffee (Laporte). However, consumers are still purchasing coffee most likely because the caffeine in coffee works like any addictive drug -- the more you have, the more you’ll want -- and consumers are willing to pay higher prices because they see coffee as a necessity. In fact, the daily average consumption of coffee has just increased from 3 cups to 3.5 cups (Coffee Supply).
Despite the fact that coffee prices fluctuate due to supply and demand, one thing is for sure: the coffee industry is predicted to remain one of the world’s top industries. Therefore, jobs will continue to be created and consumers will receive their beloved coffee.
"Brewed Awakening." The Economist. The Economist Newspaper, 13 July 2013. Web. 14 Dec. 2015.
"Coffee Supply And Demand :: Economics Economy." Coffee Supply And Demand :: Economics Economy. N.p., n.d. Web. 14 Dec. 2015.
"Economics of Coffee | Black Gold Movie." Economics of Coffee | Black Gold Movie. N.p., n.d. Web. 14 Dec. 2015.
Laporte, Nicole. "Coffee’s Economics, Rewritten by Farmers." The New York Times. The New York Times, 16 Mar. 2013. Web. 14 Dec. 2015."Starbucks Cold Brew Tv Commercial Ad 2015 HD â¢ Advert." YouTube. YouTube, n.d. Web. 14 Dec. 2015.