I'm a huge fan of coffee. Huge fan. I wake up every day excited to craft some sort of oat milk espresso concoction. On days when I need a serotonin boost, I treat myself to a quality Grit coffee. Although pricey, I consider the drink worth the money because the final product is so delicious and guaranteed to keep me alert in class. My go-to drink at Grit, large iced red eye with oat milk and honey, costs about $4.50. Most days, my demand for that drink is roughly at that market price and my consumer surplus is zero. Yet on days when I don’t get as much sleep, my demand is higher, and I’d be willing to pay much more for that same drink. Around finals week when I’m especially sleep and serotonin deprived, I’d probably pay upwards of $9 for the drink, increasing my consumer surplus to around $4.50. All I can say is I am so happy my barista has not taken Public Choice.
The reasoning behind this statement is that if the barista had taken Public Choice, he or she would fully understand the concept of consumer surplus. Consumer surplus is defined as “the difference between the consumers' willingness to pay for a commodity and the actual price paid”. During average weeks, Grit should charge the market price for their drinks. Yet during weeks when Grit know students are getting less sleep and thus place a higher dollar value on their drinks, the cafe should increase their prices to meet the new demand and increase revenue. Sleep deprived students are more in need of caffeine and are willing to pay more for the drinks. In economic terms, their demand curves have shifted out and the market price has increased. For me, a relatively broke, utility-maximizing, caffeine-dependent college student, I’m quite happy Grit does not employ this pricing strategy.
2 comments:
Emily—your post made me smile and the discussion of consumer surplus is correct. I can totally relate (some days) to having a much higher reservation price than the actual cost of whatever caffeine beverage I choose to consume.
I would say, however, to be careful when making the claim that Grit "should" increase their prices during stressful academic times, such as finals week. You are making a normative statement that does not account for a critical assumption: ceteris paribus. It must be kept in mind that the conclusions we draw from changes in economic models—such as the shifting out of a demand curve—are rooted in the presumption of "ceteris paribus", meaning "all else equal". While your reasoning is perfectly sound under the assumption ceteris paribus, without it we could not say so for certain. For instance, what if a nearby competitor, such as Starbucks, cut their prices in half at the same moment that Grit increased theirs? This would cause a decrease in demand for Grit's goods in favor of a substitute and thus lead to a decrease, rather than an increase, in marginal revenue.
I believe a more appropriate rationale for what you are getting at would sound something like: "given a surge in the demand of caffeine-dependent students during finals week, all else the same it is in Grit's best interest to charge higher prices to meet this heightened demand". This is the difference between normative and positive economics.
I wanted to add to the previous comment to say that Starbucks may already be doing something to adjust to market demand for coffee. One of my favorite drinks is the peppermint mocha, which is one of their seasonal drinks. They typically start promoting it in November, and it is about $5 per cup. This is definitely very expensive, but I like how it tastes and am willing to pay for it.
You can order this drink year-round. Sometimes, I will order it in January or February, and it is about a dollar cheaper. Maybe this drink is more expensive to produce during November and December because every coffee shop is buying inputs like peppermint, and peppermint could be less expensive when it is not the holiday season. It could also be that Starbucks knows people enjoy seasonal drinks and will derive greater consumer surplus during the holidays. As a result, they adjust the price to reflect demand for holiday drinks.
Post a Comment