Question

QUESTION 7

1. Would demand for a cup of coffee be more or less elastic than demand for a cup of Starbucks brand coffee? Why?

   		Demand for coffee in general would be less elastic than demand for Starbucks coffee because Starbucks coffee is known for being very strong and thus its customers are very loyal.
   		Demand for coffee in general would be less elastic than demand for Starbucks coffee because while there are few close substitutes for coffee (perhaps tea or hot cocoa) there are more and better close substitutes for Starbucks coffee (any non-Starbucks coffee, such as Dunkin Donuts or Wawa or a home-brewed coffee).
   		Demand for coffee in general would be more elastic than demand for Starbucks coffee because Starbucks coffee is known for being very strong and thus its customers are very loyal.
   		Demand for coffee in general would be more elastic than demand for Starbucks coffee because while there are few close substitutes for coffee (perhaps tea or hot cocoa) there are more and better close substitutes for Starbucks coffee (any non-Starbucks coffee, such as Dunkin Donuts or Wawa or a home-brewed coffee).

Answer 1

Answer :

"Demand for coffee in general would be less elastic than demand for Starbucks coffee because while there are few close substitutes for coffee (perhaps tea or hot cocoa) there are more and better close substitutes for Starbucks coffee (any non-Starbucks coffee, such as Dunkin Donuts or Wawa or a home-brewed coffee)."

Reason :

When there are no or very few close substitutes to a commodity, substitution effect is very low, i.e. consumers do not change their consumption of that commodity much in response to the change in price. Since, there are no other close substitutes to shift the consumption to or from, the demand is relatively inelastic. Similarly, coffee has no close substitute except tea or hot cocoa which are not really close substitutes. Hence, consumers do not really shift the consumption of coffee to or from other goods.

On the other hand, Starbucks coffee has many competitors as well as close substitutes. In this case, people can easily substitute Starbucks coffee with another one of its close substitute. Hence, the demand for Starbucks will be more elastic than demand for coffee.

Explanation for other options to be incorrect/inaccurate :

If a brand has a loyal customer base and its preferred by their consumers, then the demand automatically becomes inelastic. Therefore, if Starbucks coffee has a loyal customer base then demand for coffee would be more elastic than demand for Starbucks coffee. Hence, the first option is incorrect. Continuing this explanation, coffee is deemed to be a necessity for most of its consumers while Starbucks coffee is considered less of necessity and more of a luxury. Hence, in general demand for coffee would be inelastic while the demand for Starbucks coffee would be more elastic. Hence, third option is incorrect.

Fourth option automatically becomes incorrect as it is just opposite of the correct answer. The demand for coffee will be less elastic as it has no close substitutes while demand for Starbucks would be more elastic as it has many close substitutes.