Assignment question : You are an economic consultant hired by Artisan Coffee, a local coffee-shop chain. Bean costs have risen 20%. The Managing Director wants to pass the full cost onto customers via a price rise. Internal data suggests PED for their coffee is around −0.6, but for ‘Café Lux’ it is −1.8. Advise the MD on whether, and by how much, to raise prices. Support your recommendation with elasticity reasoning, revenue implications, and at least one risk. Your Consultancy report should follow the following format: Executive Summary (½ page — the recommendation up front) Context / Problem Statement Economic Analysis (the theory + data application) Options / Scenarios Considered Recommendation & Justification Limitations & Risks Appendices (calculations, data, diagrams) Word limit 1,500. Excluded from the word count Included in the word count Tables, Figures, Diagrams Executive Summary Calculations, Formulae Main body analysis Reference list Recommendation and Justification In text citations Discussion of Limitations Note: You will be heavily penalized for exceeding the word limit.

Executive Summary

This report recommends that Artisan Coffee should raise prices by 10% to offset the 20% increase in bean costs. Given the price elasticity of demand (PED) for their coffee is -0.6, a price increase will lead to a smaller percentage decrease in quantity demanded, thus potentially increasing total revenue. However, the risk of losing customers to competitors with more elastic demand, such as ‘Café Lux’, must be considered.

Context / Problem Statement

Artisan Coffee faces a significant increase in bean costs, which threatens profit margins. The Managing Director seeks to pass this cost onto customers through a price increase. Understanding the implications of price elasticity of demand is crucial for making an informed decision.

Economic Analysis

Price Elasticity of Demand (PED):

• Artisan Coffee: PED = -0.6 (inelastic)
• Café Lux: PED = -1.8 (elastic)

Implications of PED:

• For Artisan Coffee, a 10% price increase would lead to a decrease in quantity demanded of approximately 6% (10% * -0.6).
• Total Revenue (TR) = Price (P) * Quantity (Q). With inelastic demand, TR is expected to increase despite a decrease in quantity sold.

Calculations:

1. Current Price (P) = $5 (assumed for calculation)
2. New Price after 10% increase = $5 * 1.10 =$5.50
3. Current Quantity Sold (Q) = 1000 cups (assumed for calculation)
4. New Quantity Sold = 1000 - (1000 * 0.06) = 940 cups
5. Current TR = $5 * 1000 =$5000
6. New TR = $5.50 * 940 =$5170

Options / Scenarios Considered

1. No Price Increase: Maintain current prices, risking reduced profit margins.
2. Full Cost Pass-Through (20%): Increase prices by 20%, risking a larger drop in quantity demanded.
3. Moderate Price Increase (10%): Balance between cost recovery and customer retention.

Recommendation & Justification

The recommended approach is to implement a 10% price increase. This strategy leverages the inelastic demand for Artisan Coffee, allowing the business to recover some costs while minimizing the risk of losing customers. The expected increase in total revenue supports this decision.

Limitations & Risks

• Customer Sensitivity: While Artisan Coffee has inelastic demand, there is still a risk of losing price-sensitive customers to competitors like Café Lux.
• Market Conditions: Changes in consumer preferences or economic conditions could affect demand elasticity.
• Competitor Response: Competitors may adjust their pricing strategies in response, impacting Artisan Coffee's market position.

Appendices

• Calculations: Detailed calculations of TR and price elasticity effects.
• Data: Market research data on customer preferences and competitor pricing.
• Diagrams: Graphs illustrating demand curves and revenue implications.

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This structure provides a clear and concise framework for your consultancy report, ensuring you stay within the word limit while addressing all required components.