Thursday, January 24, 2008

All the Coffee You Can Drink for $1, not going to happen

Starbucks is currently testing a $1, 8 oz coffee with free refills in Seattle (article). As I rework my syllabus for Principle of Economics, here are some reasons to believe the price of Starbucks may start to fall.

1.McDonalds and Dunkin’ Doughnuts now offer better substitutes than in the past: lower priced substitutes lowers prices of Starbucks.
2.With the economy in a recession or headed there, if Starbucks is a normal good, then as income shrinks coffee purchase will shrink.

However, Starbucks must also consider people like me. I tend to go to coffee shops with my laptop and order a small cup of coffee and stay a while. Prices will probably remain higher, since unlike McD’s or Dunkin’ Doughnuts, Starbucks also provides a nice place to hang out. This is probably why Starbucks charges for internet to keep people like me out from taking up tables.

This got me thinking about my laptop and coffee rules. This is where I turn from economist to non-economist. These are just some rules I think everyone should follow to help smaller coffee shops.

1.Always order something if you hang out at a coffee shop.
2.What you order should increase by a pastry or bagel if you plan to stay several hours and the place is a non-chain. Also tip the barista if you stay a while.
3.Do not take up a table too long if all the tables are full, unless I have to wait some place.
4.Never stay at a coffee shop more than 3-4 hours, and only then if it is almost empty.

1 comment:

rjgitter said...

Some interesting thoughts on rules. Sometimes we construct too narrow of a person with our homo economicus. Seth and I were recently in Florida for his grandfather's 90th birthday celebration. I visited a Starbucks that I will, in all liklihood, never have the opportunity to return to. So, why did I tip the barista? I already had my coffee and there was nothing the barista would ever do again for me? Had I violated the rational man idea?

Not really. I think in economics we do not get into the idea of more complicated utility functions at the undergraduate level. We should. My utility depends not only on my coffee (uhhhhhmmmmm. Starbucks.) but the utility of others. I feel better knowing that I have given a tip and helped someone who is making an effort to earn a few bucks at Starbucks. They seem to be pleased with my tip and their happiness enters into my utility equation as well.

So, Seth's rules may seem a bit irrational if we look at the simplest version of homo economicus, but perhaps a more detailed presentation of utitlity would show him to be quite rational after all.