As we discussed in the earlier article, Starbucks primarily serves a demographic from which demand is relatively price inelastic, meaning that changes in price does not impact demand.
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In my paper, I went on to examine whether the increase in imports was attributable to American demand for Chinese goods being price inelastic.
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There are plenty of reasons that American demand for Chinese goods is price inelastic including, most importantly, that there are limited substitutes for those goods.
FORBES: Economists Ignore the Facts in Supporting Chinese Currency Legislation
But inelastic demand works in both directions on the price curve.
In other words, if the price of Chinese goods to American consumers increased by 21 percent (on average) and Americans reduced their consumption of Chinese goods by less than 21 percent, then demand would be considered inelastic, the price effect would dominate, and total import value would rise (adding to the trade deficit).
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Starbucks targets a more affluent demographic of coffee drinkers that typically exhibit strong brand loyalty, making demand for its coffee more inelastic with respect to price fluctuations.
The fundamental point is that, in the presence of inelastic supply curves, demand-side subsidies face a headwind of adverse price effects, while direct public provision gets a tail wind of favorable price effects.
The term inelastic simply refers to a good whose demand is relatively unresponsive to a change in price.
No matter how inelastic the demand for any commodity, be it gasoline or tobacco, there are price points where usage declines fairly rapidly.
It's inelastic demand, the same as, like, cigarettes, that can go up in price and people keep smoking, because they don't really have much of an alternative.
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