Market Equilibrium Process

Market Equilibration Process

ECO/561

September 1, 2015

Market Equilibration Process

        The Market Equilibration Process is based upon the Law of Supply and the Law of Demand.  This paper will discuss the Market Equilibration Process as it pertains to Starbucks coffee.  Starbucks recently increased the price of their coffee, this paper will analyze this change and how it may have been a factor of the Law of Supply, Law of Demand and one of the associated determinants.

Law of Demand

        “A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded. Economists call this inverse relationship the law of demand.” (McConnell, Brue, & Flynn, 2009, p. 47).  Starbucks increased the price of a cup of coffee for the first time in two years.  The price increase was implemented during a time of increased profit and great net earnings, despite of increase operating cost. (Wattles, 2015).  According to the law of demand this should decrease the quantity demanded.  According to Wattles, (2015), "The company's sales were up by 7% in the U.S., continuing a trend of sales increases that has lasted since 2010.” (para. 8).  It would be a natural assumption that the price would have the most influence over the demand of a product, but there are other factors to influence demand call determinants of demand. The determinants are consumer preferences, the number of buyers in the market, consumers’ incomes, the prices of related goods and consumer expectations. (McConnell, Brue, & Flynn,  2009). Based on the continuing trend of sales increase and the overall increase in the economy as a whole, this is one determinant that would influence demand.  

Law of Supply

        “Supply is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. As price rises, the quantity supplied rises; as price falls, the quantity supplied falls. This relationship is called the law of supply.” (McConnell, Brue, & Flynn, 2009, p. 51). Based on the law of demand once Starbucks increased the price of coffee, they should supply more coffee.  According to Wattles, (2015) “Starbucks is the largest of America's coffee shop chains and opened 600 new storefronts in America over the past year, adding to its more than 20,000 stores worldwide.”  Like the law of demand, the law of supply has several determinants.  “The basic determinants of supply are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.” (McConnell, Brue, & Flynn, 2009, p. 52).  Considering the Starbucks price increase follows the law of supply, any determinant that applied would only support the price increase and supply increase.