Siena Fagan is a coffee addict
Whenever an assignment is feeling a bit static, I pack a bag and set myself up at a coffee shop. Whether it’s the buzz of my skim cappuccino, the hustle and bustle of busy customers, or the howl of an overworked coffee machine – there’s nowhere that I work better than a cafe.
I’m not alone – Aussies love coffee.
In fact, according to a 2025 study by Food Standards Australia, 87% of Aussies regularly consume caffeine.
Considering that caffeine is the world’s most normalised stimulant, why is it that we drink so much of it?
The economics of coffee runs deep, and well beyond my personal productivity spikes.
A photo taken from my ‘local’. Where I can be found most Sunday mornings, airpods in tow, typing frantically on my laptop
A fairly obvious connection could be how coffee is priced.
Most cafes will give you an option of at least small and large, but may differ over what you get in that order.
For example, a medium coffee at ‘cafe a’ might cost $6 for 250mL, and two shots of coffee. But, ‘cafe b’ may offer a large, also at two shots, but a total of 300mL, at $7.
Is one of these a better deal than the other?
That comes down to ‘consumer tastes’: the individual quirks when it comes to consumer demand. Someone may prefer a milkier coffee and be willing to pay the difference. I personally count my caffeine intake by shots – so would opt for the $6 to save money.
While not always intentional, this case demonstrates a paradox in the market – where an unknowing customer believes they are getting the better deal out of the option with the most millilitres.
The mechanism to combat this is ‘provision of perfect information’ which is great in theory, if you have the time to visit and cost map all of your local coffee shops.
Presume you wanted to do just that: consider the benefits and costs of all your locals to determine which has the perfect allocation for you. What else would you need to consider?
Two things.
The first is experience economics – the way that we value a non-physical purchase. The funkiest cafe in your suburb probably has the most expensive coffee… and they get away with it!
A chic coffee-shop-cross-vintage-store that I stumbled across in Tweed Heads. Much too cool for me…
Because we like to feel good while spending money.
You’ll cop the extra cost of nice surroundings and calming music while you sip your drink and catch up with friends because, odds are, if you’re sitting down for your coffee you plan on enjoying it.
The second is substitutes…low fat, skim, lactose free, double shot, extra sugar, extra hot, extra ice, no marshmallows, decaf, one pump of vanilla, medium in a large cup, topped up with boiling water, cappuccino with no chocolate on top.
Consumers tend to enjoy picking and choosing their add-ons and subtractions when it comes to purchasing goods, until they have a concoction that matches their exact wants and needs. That often means a price discrimination occurs in a two-part tariff.
In two-part tariff price discrimination, there are two parts to the cost of a good. The first is a baseline cost that everyone must pay (for example, a plain coffee). The second is the add-ons that make it suited to the consumer’s tastes, like 50 cents for almond milk, or a dollar for a size upgrade.
A personal favourite ‘add-on’: Kahlua.
Any given market is influenced by the tastes of the consumers within it. What sets coffee apart is the immediacy of differentiation.
Does that make you more inclined to spend money on a whim? When you aren’t required to think all that hard about your extra costs?
Hard to know without a spreadsheet, I suppose.
I, for one, dwell in blissful complete oblivion of the $37.80 weekly average that I spend at my local coffee shop…
