To inspire and nurture the human spirit – one person, one
cup and one neighborhood at a time.
Starbucks Malaysia
Starbucks ® Malaysia, the highest quality arabica coffee in the world has its first opening store was in Kuala Lumpur on the 17th December 1998. Starbucks® Malaysia was operated by Berjaya Starbucks Coffee Company Sdn Bhd., a joint-venture between Starbucks Coffee Company and Berjaya Group Berhad. The first Starbucks coffee retail was located are KL Plaza which is the main city in Malaysia. Globally, Starbucks has 17,009 stores in total as from 12 of January 2011. To look closer at Starbucks ® Malaysia, the size of the firm is large as it also expanded its business to Sabah and Sarawak and has 140 retail stores in Malaysia since January 2012. Firstly, Starbucks® Malaysia offers a range of products for the customer to enjoy in the stores, at home and on the go. The main product of Starbucks ® Malaysia is coffee.
In Malaysia, Starbucks® Malaysia is considered as a luxury goods and normal goods. For example, people with higher income in city such as Kuala Lumpur (KL) will treat Starbucks as a normal good compared to people in with lower income in Terrenganu which they treat it as a luxury good. According to (Mohamend, 2013), KL’s average household income leading with the highest rate of 14.9% compared to Terrengganu with the rate of 9.1%. (Mohamed, 2013)
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Graph 1: The relationship between income and quantity demanded for luxury goods. The higher the household income, there is a higher percentage on the consumption of luxury goods. It has high income elasticity. (economicsonline,[no date])
Short Run and Long Run Production
As it was stated on the above that Starbucks® Malaysia has open its first store in KL Plaza. Since it was a newly open store in the year 1998, it is considered a short-run production. Short-run production is a time period one of more of the resources used is fixed while others can be varied. When the demand for Starbucks coffee increase, Starbucks® Malaysia will eventually produce more coffee beans from the factory. Thus, additional labours are required into the production. However, during that time, the capital (store) is the fixed input because it is impossible to open a new store at a short period of time. After a period of time, diminishing marginal return arises when the number of labour kept increasing which will cause a decrease output of Starbucks. (Riley, 2012) In a short run, there will be a fixed input which is the store that will cause the productivity level to decrease because the labour has less space to work. The store is not big enough for the workers to move around. 
Graph 2: Diminishing Marginal Returns happens when the marginal product starts to fall as there are additional workers. For example, when there are 40 labours, the marginal product is 80. As there is an increase in labour to 120, the marginal product eventually diminishes to 52. (Thomas and Maurice, 2008)
Starbucks ® Malaysia changes from short-run to long run production after a certain period of time when the business has enough capital thus the inputs are variable. Starbucks is considered as a monopolistic firm because there are many buyers and sellers and the product is differentiated. Comparing Starbucks coffee with the normal coffee in a coffee shop, Starbucks coffee is differentiated in terms on the brand and the quality of the coffee. In a short run, Starbucks will be making profit. However, when Starbucks makes profits, this will encourage the other firms to enter to the market and will eventually push the price down. As the other firms join into the industry, Starbucks will be earning lesser and lesser profits. On the other hand, when the firms earn lesser and lesser profits, the other firms will leave the industry. As there are free entry and exit of the industry, Starbucks will make zero economic profit. (Boundless, [no date])
Graph 3: In a short run, Starbucks will make profits as the price is above the average total cost. On the other hand, many firms will join the industry and will Starbucks will make a loss where the price is lower than the average total cost. (Mcconnell and Blue et al., 2012)
Graph 4: In conclusion, the monopolistic competition makes only zero economic profits in the long run due to the easy entry and exit of the other firms. (Mcconnell and Blue et al., 2012)
However, it was stated that all the input in long run is variable. In the long run, there will be an increasing return to scale. For example, when there is a 10 % percent increase of labour, the output will be more than 10 %. This is due to the work specialisation where the tasks are broken down into a more specialised task to increase the level of efficiency. (Paudyal,[no date]) Thus, the average cost curve decreases as many labour are added. After a certain level, decreasing return to scale will happen if Starbucks wants to produce more and more coffee. There will be a rise of average cost. If Starbucks produce more, it will find difficult in finding the best employees, not only that, management problems will occur.
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Graph 5: This graph shows that there will be economics of scale as additional input increases. After a certain period of time, when the firm increases all its resources, diseconomies of scale will happen (Riley,2012)
Determinants of Demand and Elasticity of Demand
One of the determinants that will change in the movement along the curve is price of related goods. When other things remain constant, as the price of Starbucks coffee increase, eventually people would go for another substitute. Therefore, the quantity demanded for Starbucks would decrease. People would go for another alternative such as The Coffee Bean as a substitute which the price is relatively lower than Starbucks. It was clearly shown that if the price of Starbucks coffee increase, the demand for The Coffee Bean will increase. It is known as the cross elasticity of demand whereby there is a measure of the responsiveness of demand for a good to change in the price of a substitute.
Graph 6: Rise in price of Starbucks will increase the quantity demanded for The Coffee Bean. The demand curve will shift to the right. It is a positive cross elasticity of demand. (Riley,2012)
Besides that, fresh food such as pastries, sandwiched, salads etc. are also products that Starbucks® Malaysia provides. It serves as a complement good which goes well with Starbucks coffee. (Leshner and Camacho et al., 2007) When the price of Starbucks coffee increase, the demand for Starbucks will decrease. Since fresh food is a complement to Starbucks coffee, the demand for fresh food will also decrease. However, this also depends on the preferences of different types of people because some of the people go to Starbucks just to have a cup of coffee. Some customers just come to Starbucks and grab a cup coffee and leave. (Gallopo, 2013)
Graph 7: The graph shows the demand of complement goods for certain type of people. Rise in price will decrease the quantity demanded for fresh foods. Demand curve shift the left and equilibrium price fall. Cross elasticity of demand is negative. (Riley, 2012)
Moreover, another determinant that would cause the shift of the demand curve is taste and preferences of an individual. People with different income will have different preference. If one person likes and enjoys drinking coffee, the quantity demanded will increase as that person would buy more. Thus, the demand curves will shift to the right. But when one does not like to drink coffee, the demand will decrease as a result of left shift of the demand curve.
Price elasticity of demand measure of the extent to which the quantity demanded of a good changes when price of good changes. According to Wong (2013), Starbucks raises its price by 1 percent. When Starbucks increases the coffee price by 1%, the quantity demanded will decrease by more than 1% However, this is known as elastic demand because Starbucks coffee is a luxury but not a necessity.
Graph 9: This graph shows that there is a great the change of quantity demanded when there is a change in price. (Gerth, 2004)
Determinants of Supply and Elasticity of Supply
Moreover, there are also the determinants of supply such as the cost of production. Recently, the government had announced that there will be an increase of 20 cents of petrol price. There will be an increase from RM 1.90 to RM2.10 for RON 95 per litre and from RM1.80 to RM2.00 for diesel per litre as well. (Lim, 2013) Starbucks need transportation to deliver the raw materials (coffee beans) to the shop in order to produce the coffee. Since there is a rise on the transportation cost, the cost of production will rise as well. Therefore, there will be a less supply of Starbucks coffee and the supply curve will shift to the left. According to Quay (2013), the managing director of Starbucks, there is an increase of demand of Starbucks in Malaysia. If the quantity demand for Starbucks is more than the quantity supplied, a shortage will occur which means that buyers are competing for the limited amount of goods.
Graph 10: The above graph shows that shortage of 3 of the coffee. At the price of RM8, the quantity demanded(5) exceeds the quantity supplied(2). When this happens, buyers are willing to spend the amount of money for that particular good. On the other hand, the supplier will increase the price of goods in order to earn more profit. (Hoffarth, 2007)
In addition, the number of sellers would also af, there will be affect the quantity supplied. If there is a lot of coffee industry, there will be a competition in the markert. As there are more firms enter the coffee industry, the more coffees will be produced. However, an increase the number of sellers will result in the increase in the supply coffee. Thus, the supply curve will shift to the right.
Graph 11: An increase the number of suppliers will increase the quantity supplied. Thus, this will shift the supply curve to the right. Hence, equilibrium price will decrease.
One of the determinants of elasticity of supply is time period. The greater the time for Starbucks to respond to the price change, the more elastic the supply. However, in the long run, supply is more elastic than in the short run. This is because in the long run, the factors of production are varied. Moreover, in the short run where there is one fixed factor, Starbucks cannot respond to the increase price of Starbucks because it takes time for Starbucks to purchase a store.
However, the availability of substitutes is also one of the most determinants of supply, The closer the substitutes, Starbucks can easily alter the production if there is a increase or decrease of prise. Hence, the supply is elastic.
References List
Boundless. 2013. The Long Run. [online] Available at: https://www.boundless.com/economics/monopolistic-competition/monopolistic-competition/the-long-run/ [Accessed 15 Oct 2013].
Economics Online. n.p. Demand and Income. [online] Available at: http://www.economicsonline.co.uk/Competitive_markets/Demand_and_income.html [Accessed 15 Oct 2013].
Galuppo, M. 2013. The 6 Types of People Line in Starbucks. [online] Available at: http://hellogiggles.com/the-6-types-of-people-in-line-at-starbucks [Accessed 19 Oct 2013].
Gerth, D. 2013. Pricing. [online] Available at: http://ww2.nscc.edu/gerth_d/MKT2220000/Lecture_Notes/unit09.htm [Accessed 24 Oct 2013].
Hoffarth, G. 2013. Supply and Demand. [online] Available at: http://instruction.blackhawk.edu/ghoffarth/economics/ecounit3.htm [Accessed 20 Oct 2013].
Lim, A. 2013. RON 95 and diesel to go up by 20 sen per litre at midnight – RM2.10 for RON 95, RM2.00 for diesel. [online] Available at: http://paultan.org/2013/09/02/ron-95-diesel-go-rm2-10/ [Accessed 21 Oct 2013].
Leshner, H., Camacho, C. and Damassa, S. 2007. Untitled. [online] Available at: http://economics-files.pomona.edu/jlikens/SeniorSeminars/harknessconsulting2008/pdfs/Starbucks.pdf [Accessed 24 Oct 2013].
Mcconnell, C., Blue, S., Flynn, S. and Grant, R. 2012. Economics. 19th ed. New York: McGraw-Hill/Irwin.
Mohamed, N. 2013. KL average household income. [online] Available at: https://forum.lowyat.net/topic/2756094/all [Accessed 19 Oct 2013].
Paudyal, A. n.d. Long Run Production Function. [online] Available at: http://arjun.net.np/bba/10.php [Accessed 15 Oct 2013].
Riley, G. 2012. Production in the Short-run & Long-run. [online] Available at: http://www.tutor2u.net/economics/revision-notes/a2-micro-shortrun-longrun-production.html [Accessed 18 Oct 2013].
Sydney Quays, 2013. Increasing demand for Coffee in Malaysia (video online) Available at: http://www.youtube.com/watch?v=yJf1cz-p4Xc [Accessed Date 20 October 2013]
Thomas, C. and Maurice, S. 2008. Production and Cost in the Short Run. [online] Available at http://www.freewebs.com/mrsstoudt/Honors%20Economics/Beginning%20Materials/Microsoft%20Word%20-%20Starbucks%20Example%20_06_.pdf [Accessed: 15 Oct 2013].
Wong, V. 2013. Starbucks Is Raising Its Prices Today. But By How Much?. [online] Available at: http://www.businessweek.com/articles/2013-06-25/starbucks-is-raising-its-prices-today-dot-but-by-how-much [Accessed 22 Oct 2013].
