The Great Coffee Conundrum: Understanding Price Elasticity of Demand

In the bustling city of Maplewood, two coffee shops, Brew Bliss and Café Royale, competed fiercely for customers. Both served top-quality coffee, but their pricing strategies were very different.

One day, a sudden coffee bean shortage hit the market, forcing both shops to raise their prices. That’s when they noticed something interesting…

The Experiment

☕ Brew Bliss increased its price from ₹100 to ₹120 per cup. The result? Sales dropped drastically—regulars started brewing coffee at home or switched to cheaper alternatives.

☕ Café Royale, on the other hand, also raised prices—from ₹300 to ₹350 per cup. But guess what? Sales barely changed! Their loyal customers were still willing to pay the premium.

What Just Happened?

The owner of Brew Bliss, Ramesh, was confused. “Why did my customers disappear, but Café Royale’s remained the same?”

A friend, an economics professor, explained:
"That’s because of Price Elasticity of Demand (PED)—a measure of how sensitive customers are to price changes."

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The Formula for PED

$$PED=\frac{\mathrm{\%}\mathrm{\Delta }Q}{\mathrm{\%}\mathrm{\Delta }\mathrm{P<span\; style="font-family:\; "Roboto\; Mono";"></span>}}$$

Where:

• ΔQ = Percentage change in quantity demanded
• ΔP = Percentage change in price

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Elastic vs. Inelastic Demand

📉 Brew Bliss had ELASTIC demand – Since people had substitutes (home-brewed coffee or cheaper brands), a small price increase led to a big drop in sales.

📈 Café Royale had INELASTIC demand – Their customers valued experience and brand loyalty, so even after a price hike, demand barely changed.

The Lesson?

🚀 If your product has many substitutes, raising prices can hurt sales.
🚀 If your product is unique and premium, people will keep buying despite price increases!

As Ramesh realized his mistake, he started working on improving brand loyalty, offering a better ambiance, exclusive blends, and a coffee subscription model to make his customers less price-sensitive.

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Key Takeaways

✅ Elastic Demand → Small price change = Big impact on sales (e.g., regular coffee).
✅ Inelastic Demand → Price changes don’t affect demand much (e.g., luxury brands).
✅ Smart pricing depends on understanding customer behavior!