Every morning I MUST have my daily dose of coffee. Without it I am completely lost for the entire day. However, the coffee at Starbucks ( "Fivebucks" as my dad calls it) is somehow superior and I am willing to pay almost any price for their coffee. Obviously if it is 100$ for a tall latte I might cut back, but within reason my demand for Starbucks is perfectly inelastic. Firstly, their are few to no substitutes for Starbucks in walking distance or on my way to and from school and work. It is most definitely essential to my daily life. It does not require a large share of my wealth (or at least per each trip). And lastly must be purchased every morning...or else.
But what about the supply of coffee??
Surprisingly, there is a large supply of coffee beans grown and then imported into the United States. This accounts for the relatively low cost (input price) to produce
the venti skinny vanilla latte with a pump of carmel and light on the foam that I order every morning.
HOWEVER, because Starbucks has market power, they are what we call "price-makers" and can make large profits. Their coffee is highly demanded and consumers are willing to pay high prices. Therefore they charge a much higher price than the actual average total cost per cup of coffee.
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