7/21/11

The economics of expensive coffee, why would you ever pay $4.00 for a cup of Joe?



Photographer Robert Knapp

Here I sit in a Starbucks while on vacation.  Why?  Because I forgot to call my friends ahead of time and now I am waiting for them to finish errands, so why not make a post?  Personally, I am ok with paying $4.00 for a cup of coffee when I get my laptop charged for two hours, and free Wi-Fi!  Especially because there is nowhere else I know of that I can do this around here.  However, while I have been here, I have seen lots and lots of people walk in and buy a cup of coffee and then leave.  What could possibly motivate us to spend so much on coffee?


As I sit here and ponder this idea, three things immediately come to mind.  First, we have always had a strong demand for coffee, in fact a lot of us start everyday with it.  I have also heard that coffee is the most traded commodity in the world (just checked, it is number two next to crude oil).  Second, expensive coffee became popular during an expansionary economic period when the wealth of individuals was rising, and coffee became a status symbol on top of its normal consumptive properties.  Finally, convenience.  This argument goes along with the whole growth in the fast food industry that we have seen.

My personal thought is that the economic boom increased the demand for coffee, according to the income effect (because coffee is a normal good, thus higher income means higher demand).  But at the same time, “Starbucks” coffee can be considered a luxury good (because higher coffee consumption doesn’t necessarily mean we can’t make and drink it at home).  Because the “rich” were enjoying this new expensive beverage, it became a status symbol similar to brand name handbags or suits.  Because coffee is relatively inexpensive (on a daily basis), anyone could enjoy this new phenomena without destroying their budget.

However, then the recession hit and incomes dropped.  While many people did decide to reduce coffee consumption or switch back to drinking coffee at home or work, many didn’t!  They continued to buy this overpriced coffee because of what their co-workers and friends were doing, or simply because they were sucked in by the convenience.  Now, in order to now justify the prices to their cost-conscience customers, Starbucks and other companies began promoting free Wi-Fi, fair-trade coffee, and other amenities to keep people coming to their stores.  

Even though the hay day of Starbucks is over, they still get plenty of customers who long for the good old days of coffee as a status symbol.  As well as customer like me, who are here for the free Wi-Fi!

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