The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food

This article discussed how the increasing problem of chronic diseases caused by diet-related issues has driven researchers to find different ways to improve peoples’ diets. They decided that one way to combat the issue is to change the prices of selected foods through a designed tax or subsidy policies. The researchers figured that lowering the price of healthier foods and raising the price of less healthy alternatives would change purchases toward the healthier options. Also, something such as adding a tax on certain products like sugar-sweetened beverages would turn people toward other, healthier beverage choices.

The researchers acquired all the studies conducted in the United States regarding food price elasticity of demand and combined the estimates into average price elasticities for sixteen food and beverage groups to figure out the food demand and consumption over the past seventy years. They focused on differences in price effects across income levels.

The price elasticity of demand is the percentage change in purchased quantity or demand with a change in price. It is determined by factors such as the availability of products, a persons’ income, and preferences. Price elasticities are more likely to be higher when the goods are luxuries, when there are substitutes for a good, and when consumers have more time to alter their behavior. Elasticities are lower for products that are necessary or goods with few substitutes. When the change in purchased quantity is below the change in price, this means the demand is inelastic and below 1.0. When changes in demand are above the price change, it means it is an elastic demand and is above 1.0.

The study resulted in all the mean price elasticities being inelastic ranging from .27 to .81. When income or prices changed, soft drinks, juice, meats, fruit, and cereal were relatively less inelastic and eggs, sweets, cheese, and fats were the most inelastic. Food away from home was the most responsive to changes and more elastic than the demand for food at home. Higher elasticity suggests a greater change in demand as prices shift.

This article really illustrated the effect of changes in the price of products on the elasticity of demand for that product. It included many factors that can account for changes in elasticity such as raising prices and changing incomes. I felt that this article related really well to what we learned in class about this topic.

http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=6&hid=15&sid=55679fae-4921-4d33-a784-0a7019da73bf%40sessionmgr13

Critique Out With The Old In With The New

The author of the article “Out with the Old, in with the New” makes a very valid and compelling point about the existing fight against technology. As technology has spread more and more across the United Sates it has made manufacturers much more productive by having computers perform many simple and routine tasks. With this increase in technology comes the employment of fewer workers, lowering the price of production even more. I agree with the author that this increase in technology is awful and in no way beneficial for the workers who are losing their employment to new computers and machines, however I think numbers and statistics would have beneficial to his article. For example according to The Heritage Foundation the US manufacturing employment has dropped dramatically in just over twenty years. In 1987, 17.5 million workers were employed quarterly however in 2010 only 11.7 million workers were employed quarterly. This illustrates the vast change that technology has caused in our nation.
As the article states, the effect of adding more technology and firing workers comes full circle. This vast spread of technology would definitely lower the production price meaning the cost of the product would also decrease. As the author said this would increase the consumers demand and the supply of the product. I agree that the price of production will decrease and the production amount will increase, however will people have the money to buy the goods, since many of them may have been laid off? I believe this would make a small difference however I would not support the author’s beliefs in stating “Sure it is lowering prices of products which allows consumers to go out and spend money but with the decrease in (manufacturing) jobs it makes spending money very difficult.” I don’t think the author thought fully about this statement, as it would only affect a very small amount of income for the firm, since he is only referring to those who lost their job. This situation is also known as creative destruction, a term first linked to Joseph Schumpeter, an Austrian economist. Creative destruction, meaning something new kills or slowly takes over for something old, can be related to this loss of jobs due to the increase of technology. While technology has slowly crept into our society, it has been taking over for jobs more and more. This helps expand our knowledge for the subject and helps us better decide whether technology is beneficial to our society. I believe the author thought long and hard about the outcomes of technology especially if it keeps expanding. I believe it may be helping out nation economically as prices from the firms would be lower since the production costs are less. However my only concern which the author of the former article touched upon, would be if the consumers had the extra money to spend since so many were laid off.
I think this article was beneficial to the cartoon comic strip which stated “Meet our new factory manager.” Technology has become such an integrated part of our society that we no longer even think about it, we simply accept it. However should we be thinking about it more and be much more aware of its presence? I agree with the author that its time to become more conscious of technology and its ever present force on our society. If technology continues to take over our society and jobs who knows where our society will be in ten years or even 20 years.

http://www.heritage.org/research/reports/2010/10/technology-explains-drop-in-manufacturing-jobs

Extra Credit

Millie has an extra credit question for you:

I am working on a labor economics report and want to know what was the number of new jobless claims reported this week?

My report is due in 48 hours so I need your help by then.

Thanks - Millie Kassens

Critique of Rising Gas Prices

The previous blog discussed the rise of gas prices in the past few weeks. This article discussed brought up a few issues that I would have to disagree with. The main points I disagree with in the blog and article are that the expectations that the Federal Reserve may increase the money supply is influencing the increase in gas prices, that the demand for gas in weak, and that gas is not considered inelastic.

I find it a stretch to contribute a rise in gas prices to an expectation that the money supply is going to be increased. I can understand why the prices may rise if the Federal Reserve did in fact decide to increase the money supply but I don’t believe that purely anticipation of the event is the cause for the rise in prices. Gas prices are constantly changing for a variety of reasons. We all have seen how gas stations will raise prices during high travel times, like Thanksgiving or Christmas, just to increase their profit margin. This is just one example of a reason gas prices can raise but a little over a 5 cent increase in price is not a large enough to assume that prices are raising because of a possible increase in the money supply.

Secondly, I strongly disagree that the demand for gasoline is weak and the supply is strong. If this was true there would not be such a push for new ways of transportation that do not rely on gasoline. America alone is very dependent upon oil and other countries, like China, are also increasing their consumption, raising the demand even more. Hurricane Katrina served as an example of how dependent we are on gasoline. When people heard that gas may be scarce due to the hurricane hitting the oil rigs consumers fled to gas stations making prices skyrocket. People panicked at the idea of not having enough gasoline to get them through their daily activities.

Lastly, I believe that gasoline is inelastic. Consumers may have been able to slightly reduce their consumption of gasoline during the recession by carpooling or using mass transportation but the demand can only be reduced so much. Everyone has places that they are expected to be at like work or school and they depend on gasoline in their cars to get them there. Consumers continue to buy gas regardless of the fluctuations in price. No one is going to tell their boss that they can’t be at work today because gasoline is too expensive.

Overall, I feel the article made broad assumptions about the rise in prices with disregard to many other influences. Americans are very dependent upon gas for their daily life making the demand for this product strong. The strong demand that is not affected by price also makes gasoline inelastic.

Windows losing to Apple

As societies continue to expand on a constant basis, the new for technology to adapt quickly and efficiently is an absolute necessity to any technological based business. There are many companies, or firms that are competing for the attention of consumers, in order to attract consumers the overall product that the company is offering has to separate itself from the competition. As many people know, Apple is a growing firm that has recently drawn a lot of attention from the consumers. As apple continues to increase its production and grow as a company attention is being drawn away from a once monumental force in computer technology. Windows is on the decline in consumers purchasing their products due to competitors creations of technology they are not producing. Since technology is inelastic in terms of societies dependency on technology and a relatively elastic product with consumers having many options to choose from companies need to make their product different or more desired by consumers in order to maximize their own profits. Apple which recently released the iPad is attracting much of the attention that used to be given towards Windows and their innovations. Windows was recently surpassed by Apple in terms of market value due to their lack of innovations that other companies do not already possess. I personally being a Mac user would have a hard time going back to Windows. Some of their programs seem obsolete and many people are jumping on the Apple bandwagon so I can clearly see why the overall demand for Windows would be decreasing. The market for Windows will continue to decrease if they do not produce an answer for all of Apple's new technology. If the demand continues to decrease Apple will almost form a small monopoly in the technology world without competitors for many of its products like the iPod or the iPad. With Windows having almost 90,000 employees its not as if these innovations just snuck up on the Windows company, many of the innovations Windows produced were not executed correctly and in tern failed to produce revenue or any profit for the company. Windows in order to survive in the market will have to produce some sort of new technology in order to slowly bring the market back to equilibrium among technology based companies. With the successful production of a new form of technology or a worthy competitor to Apples innovation Windows will start to maximize profit, regain control of the market and make it harder for consumers to choose Apple or Windows. The new competition formed will be healthy for the market and allow both companies to continue to expand and successfully help the spread of technology and continue to contribute to the overall economy.

http://money.cnn.com/2010/10/27/technology/microsoft_pdc/index.htm?source=cnn_bin&hpt=Sbin

Critique Gas Prices inch up as oil prices rise

The previous blog about the rise of gas prices gives us some of the reasons why the price of gasoline continues to rise. As the blog mentioned the price of gas has been on the rise, going up just over five cents in the previous two weeks. The author of the blog had a quote from the original article that said gasoline demand is weak. I, like the author of the blog, find this a bit surprising. I agree that people are not taking as many road trips as they have in years past due to the recession and constantly rising gas prices but I also think that gas is an inelastic product. The majority of people in today’s society have a vehicle and use it daily to go back and forth to work and run errands. I believe the demand for gasoline is still very high. How many people could really go without using their car for multiple weeks? People use cars to go almost everywhere they go, gas is a product that most people could not go without for an extended period of time.

While there are alternatives to using your own vehicle to get from place to place, many of these forms of transportation use gasoline as well. Buses, for example, need gas to run. So if everyone took the bus there would still be a need for gas to run the buses. There are some alternatives that avoid the use of gas altogether such as walking or riding a bike. But how efficient are these alternative? Think about how many people commute long distances to work, walking or riding a bike are not reasonable substitutes for those people. What about going to the grocery store? I do not think it is reasonable to expect people who have a large family to walk or bike to the nearest grocery store then have to carry all of the goods they purchases home with them. Alternatives such as riding a bike or walking are not viable options when it is raining or snowing out. For example take someone who does live close enough to where they work that they could walk, if it is pouring rain out they will be in no condition to work by the time they get there. People in these situations are much better off to take their own vehicle wherever it is they are going, and their vehicles need gasoline to run. I agree with the author of the blog when he says that he thinks gas is an inelastic product. I would have to disagree with the comment from the original article that said demand for gasoline is weak. I do not see how the author of that article could say that since so many people need gasoline on a daily basis.

Critique gas prices inch up as oil prices rise

Written by Richard Lachlan

The rising prices of ethanol and crude oil raising gas prices to a point where consumers are buying less and less gas can't be explained by the supply and demand model as the companies selling gas have over looked something very big that was not touched upon in the previous entry. The suppliers of gas think that they have a hold on the industry and can raise prices higher and higher as they don't see any substitutes for gas right now as cars need gas to drive. However there are many different substitutes to driving. Public transit, walking, biking etc, can all be used instead of driving. And now that prices have gotten so high people are choosing alternative methods of transportation. If gas companies want to make any profit they are going to have to cut prices or they are going to lose large amounts of customers.

As mentioned in the original post demand is very low and supply is very high. The only way for a new equilibrium to be found is to cut prices down to a reasonable level. Gasoline may seem like a very inelastic commodity but there is a point where, the amount paid for gas is just to much for the average person and they need to find different methods of transportation. If prices do not get cut, gas may turn into a luxury good which is something I am sure suppliers and consumers do not want at all. The marginal utility of taking a bus, train etc, is on the way to surpassing driving a car due to these ridiculous gas prices.

The producers are soon going to realize all of this and a new equilibrium will be found as no company wants to go out of business. Firms do want to maximize profit and the only way for them to this now is to lower prices as a small amount of people purchasing expensive gas will not create as much profit as the majority of society purchasing gas at a reasonable price.

Gas prices will go down as companies will realize there are substitutes to driving a car. Gas companies need to take a hit in profits now so that they do not lose there consumers. Once more money is put into the gas industry more money will be available to purchase ethanol. Once producers of ethanol get more money they will be able to hire more workers produce ethanol at a cheaper price and the whole market will find a new equilibrium.

Gas Prices inch up as oil prices rise

Jimmy Bradshaw

Over the past two weeks, the price of self serve regular gasoline across the United States rose by 5 cents, according to the Lundberg Survey. Last Friday, the average price of gasoline was $2.82 a gallon, up 5.23 cents from two weeks ago.

As crude oil prices began to rise at the beginning of the month, retailers at first were willing to lower profit margins in order to retain cheap and competitive prices; however with the price of crude oil steadily increasing over the past month, and with firms deciding to increase profit margins, customers have seen a nominal increase in prices.

The initial factor in the rise of gas prices was an increase in the price of crude oil, which has been linked to bad unemployment numbers in recent months, as well as expectations that the Federal Reserve may increase the money supply. By increasing the money supply, inflation occurs which causes the value of each individual dollar to become weaker. Another factor in the increase in gas prices is the rise in the prices for ethanol. This is because there are mandates requiring certain amounts of ethanol to be sold mixed in with gasoline.

However the factors of supply and demand are not affecting gas prices according the article. “Our demand remains very weak and our supply very strong,” the author of the survey, Trilby Lundberg said. The reason supply and demand are not having an impact on the prices, are because the weak demand and the strong supply are negating each other. Normally when the demand for a good is weak, prices are going to fall, at the same time when supply is high; a firm is going to increase its prices on goods.

I am surprised that the demand for gasoline is weak, because I would like to think that gasoline is a relatively inelastic commodity. However because of the recent recession less gas is being demanded by consumers. Consumers instead are using more mass transit options, and are also not taking the leisure car trips, that were being taken before the recession. In both of these prior instances, gasoline was being used much more frequently than it is now.

When looking at the increase in crude oil prices and the increase in ethanol prices, firms are left with the option of either raising gasoline prices, or taking a cut back on the amount of profit they will earn from the sale of gasoline. And because the rule in economics is for firms to maximize profits, firms will almost always increase prices of their commodity, rather than taking a cutback on their profit margin.

In conclusion, the price of a product is a direct result of the prices of its inputs, and when the inputs for a good rise, in this case ethanol and crude oil, the price of the output, gasoline, will also rise. Normally supply and demand also factor in to the pricing of goods, but because in this case there is weak demand coupled with strong supply, prices are not affected one way or another.

http://money.cnn.com/2010/10/24/news/economy/gas_prices/index.htm

Extra Credit Fall 2010