Coffee Economics

A thought experiment

“It’s simply not possible to understand anything complicated without focusing on certain elements to reduce that complexity” — Tim Harford

What determines the price of a cup of coffee in my local coffee shop? As many things in economics, the answer is complicated. And as with many complicated things, it helps to first think about a simplified model. One such model is the perfect market model.

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Perfect markets

A perfect market (or, perfectly competitive market), is a market in which:

1. There is a large number of sellers producing identical products.
2. There is a large number of buyers interested in buying that product.
3. Sellers and buyers have complete information: every buyer knows the price of every seller, every seller knows the prices of every other seller.
4. There are no restrictions for a seller to enter the market.

A perfect market is certainly a very crude simplification to the real Economics of our world, and in many aspects far from reality, however there are some things we can learn from this model.

A thought experiment

Here’s a thought experiment: Consider a town with a perfectly competitive coffee…