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Homework answers / question archive / Instructions With all of this in mind and given what you have learned in module 5, please review Table 1 below that shows the estimated price elasticity of demand for various food categories and answer the following questions
With all of this in mind and given what you have learned in module 5, please review Table 1 below that shows the estimated price elasticity of demand for various food categories and answer the following questions.
TABLE 1
US Price Elasticity Estimates, by Food and Beverage Category, from 1938–2007
|
Food and Beverage |
Absolute Value of Mean Price Elasticity Estimate |
|
Food away from home (restaurant meals and fast food) |
0.81 |
|
Soft drinks |
0.79 |
|
Juice |
0.76 |
|
Beef |
0.75 |
|
Pork |
0.72 |
|
Fruit |
0.70 |
|
Poultry |
0.68 |
|
Dairy |
0.65 |
|
Cereals |
0.60 |
|
Milk |
0.59 |
|
Vegetables |
0.58 |
|
Fish |
0.50 |
|
Fats/oils |
0.48 |
|
Cheese |
0.44 |
|
Sweets/sugars |
0.34 |
|
Eggs |
0.27 |
Note. Values were calculated based on the 160 studies reviewed. Absolute values of elasticity estimates are reported. The price elasticity of demand measures the percentage change in purchased quantity or demand with a 1% change in price.
Table is from The Impact of Food Prices on Consumption: A Systematic Review of Research on the Price Elasticity of Demand for Food by Tatiana Andreyeva, PhD, Michael W. Long, MPH, and Kelly D. Brownell, PhD
The price elasticity of demand for food items is generally less than 1, indicating that demand is rather inelastic.
Food is a necessity, and there are certain basic food items which everyone needs on a daily basis.
This is evident from the given Table 1, where all the food items have inelastic demand. Within the given categories, some items are relatively more elastic, like fast food or soft drinks. While items like eggs, milk products, fish etc. have lower elasticity. Still, all items have elasticity less than 1.
It is no major surprise to find that all items have a lower price elasticity. It is somewhat surprising to see that sweets/sugars have very inelastic demand (at 0.34). It suggests that society has become quite addicted to sweet items, which also leads to health problems.
Also, while fast food (0.81) should probably have been more elastic, i.e.., greater than 1. Given the data, it appears to be somewhat inelastic. This once again shows that consumers have become quite dependent on it, indicating health troubles.
The other staple items, like fruits, vegetables, poultry, milk and cereals are expected to be inelastic. They have no real substitutes and are a part of our daily needs.
It would be harsh to tax such products, as people from levels of society need affordable food. Consumer surplus would be affected - as the consumer would bear the burden of the tax. However on the other hand, the government will be able to raise a significant amount of tax revenue, as consumers have no choice. On the whole, social surplus will slightly fall due to the dead weight loss.
In short, taxing an inelastic product will generate large tax revenue, with a small dead weight loss, and a moderate impact on consumer surplus.
Products where the consumer doesn't need to purchase daily and where choices are available, have elastic demand. The consumer can also postpone the purchase. For example, the purchase of a new car.
While one may feel that it is a very important decision and a basic requirement, the truth is that the consumer does have certain options and the ability to postpone.
