How Elasticity Affects the Pricing of Coffee in Mount Holyoke College

How Elasticity Affects the Pricing of Coffee in Mount Holyoke College

by An, Maame, Mariah, and Meher

Caffeine to get started in the morning, a bit more mid-morning to make it through that class before lunch, another cup for that mid-afternoon class during which food comas kick in, yet some more when the realization sets in that it is going to be a late night due to work. When walking around any university or college campus, coffee is the staple that can be seen in many students hand at pretty much any time of day. Easily half if not more of the student population at Mount Holyoke College are coffee drinkers. Many of them are addicted to the caffeine and have it at least once a day if not more often. However, coffee is an expensive habit to keep up while in college. Whether students own their own brewer, or buy cups of it from the cafes around campus, or go into South Hadley and surrounding towns to grab a cup from local and chain coffee shops, the costs of all those cups throughout the semester really accumulate. So why do students keep drinking so much coffee?

Price elasticity is defined to be “the percent change in quantity divided by the percent change in price.” It is the responsiveness of customers’ demand to the change in price, in this case, specifically, students’ choice of buying coffee when its price changes. Inelasticity is the case when the percentage change in quantity is less than the change in price. To many students in Mt. Holyoke College, their demand for coffee is inelastic, that means if the price of coffee rises, students will still choose to buy coffee. Then why is the demand for coffee of Mt. Holyoke students inelastic? Let’s take into account three groups of students. Students from the first groups take 5 academic classes this semester, not to mention a physical education class. Therefore they usually drop by Rao’s to  buy a cup of coffee before staying up until 2pm in the library writing essays, doing homework or finishing lab assignments. The second groups of students are very energetic. They participate in varsity teams such as crew team, swimming team, etc. They usually have to get up at 5 or 6 in the morning everyday to drill. Right after that, they may just purchase some coffee from Uncommon Ground on their way to classes to keep them awake for the whole day. For the third group, they are coffee lovers; thus, they usually take a to-go cup of coffee from the dining hall every time they go for their meals. For such a great demand of coffee around campus, even if the price rises, students are willing to pay higher for a cup of coffee when they need, which leads to inelasticity.

Now within this small consumer base, there are options from where to purchase coffee, namely Uncommon Grounds, Raos and Thirsty Mind (the caveat being that dining hall coffee doesn’t really count since it is often lukewarm and weak). For someone who really doesn’t have a preference between these places but often chooses Raos before heading to the library, sees the coffees as perfect substitutes. This will mean that if Rao’s decides to increase the price of their coffee by even 50 cents, all the students who consider Uncommon Grounds or Thirsty Mind as equally good, will shift to consuming coffee from those places instead. This means that the PED of Rao’s coffee for those people is infinite.

Another way to look at this is through the Cross Elasticity model. If the price of Raos coffee goes up, the quantity demanded of Uncommon Grounds coffee will increase as well. This will be reflected by a CED value > 0. On the other hand, if the price of luna bars available at Rao’s (an energy bar many students enjoy alongside a coffee), decreases, many students may feel compelled to get a coffee from Raos to go with their Luna bar. These two substitute and complement relationships are shown in the CED graph below:

Therefore, we can conclude that price elasticity of demand, as well as the Cross price elasticity of demand is what all firms producing coffee at this college would find useful to consider.