Read Eye on Elasticity at the Coffee Shop on p. 123 and then explain why the demand for latte is inelastic while the demand for a Starbucks latte is elastic.

Which demand is likely to be more inelastic: the demand for latte or the demand for coffee?

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32 When Starbucks raises the price of a latte, the first thing to do is look at the price of lattes in other conveniently located coffee shops. Suppose they have not increased and you can get an acceptable latte for a lower price at Dunkin' Donuts. You decide to switch your allegiance and keep drinking the same quantity of latte. EYE on ELASTICITY AT THE COFFEE SHOP What Do You Do When Starbucks Raises the Price of a Latte? Price Elasticity of Demand We can translate this account of your possible response to a hike in Starbucks' price into some estimates of your price elasticity of demand for Starbucks latte and for latte in general. Close Substitutes Soon though, all the coffee shops in your neighborhood have raised their price. Your daily latte is more expen- sive, no matter how you satisfy your craving for it. You look at the dwin- dling change in your pocket and decide to return to Starbucks but trim your latte consumption by a cup a week. When Starbucks alone has a higher price, you decrease the quantity of Starbucks latte to zero, so your price elasticity of demand for Starbucks latte is high-it is elastic. A Starbucks latte and a Dunkin' Donuts latte are different, but for some people they are reasonably close substitutes. So when Starbucks alone raises its price of a latte, the quantity sold by Starbucks changes a lot-the demand for a Starbucks latte is elastic. Poor Substitutes Later, when all the coffee shops have raised the price of a latte, you return to Starbucks but cut back a bit on your consumption of latte. Your price elas- ticity of demand for latte of all types is low it is inelastic. Latte, tea, water, juice, and other drinks are poor substitutes. So when the price of a latte rises, the quantity of latte bought decreases but not by very much the demand for lattes of all types is inelastic.