[Get Answer ]-Write A Summary Of This Case Study

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write a summary and explain by a graph, Case1

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Case 1

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Coffee:”Buy Low and Sell High”

In 2000, overproduction in theinternational coffee market caused the price of coffee to drop below productioncosts. In December 2001, coffee prices reached a low of 41.5 cents per pound,the lowest price in more than 30 years. Farmers in countries such as Angola, Honduras,Sri Lanka, and Zimbabwe even stopped tending their coffee trees in an effort tosave on spending for fertilizer and maintenance. Part of the problem was theusual cyclical swings in price caused by the movements of supply and demand.Recall our discussion of the short- and long-run movements in price. Inresponse to a high price, supply increases. There is often a tendency for supplyto overshift to the right, causing prices to plummet. The “long-runadjustment” of supply with demand is rarely, if ever, as smooth asdepicted in textbook diagrams. With coffee prices so low, it is believed that consumerswould benefit with a lower price for a cup of coffee. However, as readers wellknow, not all cups of coffee are created equal. While coffee prices keptfalling, specialty coffee retailers such as Starbucks were charging itscustomers $3.50 for a “tall skinny latte.” Despite the fact thatStarbucks is usually located in high-rent areas, we can imagine that the markupon these specialty drinks, given the wholesale price of coffee, definitelyhelps pay the rent and more. This shows that, although the wholesale market forcoffee may be subject to the vagaries of shifting supply and demand, the retailmarket provides a better opportunity for sellers to exert market power bycatering to the tastes and preferences of those who prefer a higher-quality productand are willing to pay for it. Starbucks is a company that until now has playedwith the forces of supply, demand, and market power like a virtuoso: It buyslow in the depressed wholesale market and sells high in the differentiatedspecialty retail market.

In mid-2004, wholesale pricesstarted to move upward, increasing by about 30 percent between May and June.The effects of the farmers who had stopped or reduced production due to lowprices had started to make an impact on the market.

(Imagine a leftward”long-run” shift in the supply curve.) There was also a drought andunusually low temperatures in Brazil, the world’s largest coffee producer.1°(Imagine a leftward “short-run” shift in the supply curve.) Bigcoffee sellers, unlike Starbucks and other specialty retailers, had not beenable to raise prices during the past 4 or 5 years because of the overalldepressed market for coffee beans. Now the cost pressures from the higher priceof wholesale beans have finally enabled them to justify the raising of theirprices to restaurants and other away-from-home customers. What will consumersdo in the face of rising prices for nonspecialty coffee. As is explained in greatdetail in chapter 4, the demand for coffee is considered to be relativeinelastic. Therefore, industry analysts expect coffee drinkers to consume aboutthe same amount as they always have. As a 10- cup-per-day consumer interviewedby a newspaper reporter stated, “I hate that the price might go up, but Igot to have my coffee.”11 Interestingly enough, Starbucks actuallywelcomes the higher wholesale price of coffee. As explained by its CEO, RinSmith, “We are paying higher prices for coffee, which we think is a good thing.One of the consequences of the low prices is that a lot of farmers have goneout of business and that threatens our long-run [emphasis added] supply.”This statement shows that sometimes continuity of supply can be as important asthe purchase price. If higher coffee prices help keep coffee farmers inbusiness, then buyers like Starbucks are willing to pay the higher price.Moreover, as stated earlier, differentiated sellers such as Starbucks are ineven better positions to raise the price than the processors who sell coffee torestaurants. In fact, in September 2004, Starbucks announced that it wasraising the average price of its beverages by 11 cents, citing “increasesin the cost of coffee and sugar

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