Tag: cross-price elasticity of demand

With recession biting, many people are cutting back on spending. This has not been even across products, however. People have tended to shift from more luxurious products, such as foreign holidays and branded products, to holidays at home and supermarkets’ own-brand products (see Shoppers opt for supermarket brands Financial Times (4/8/09)). There has also been a decline in spending on consumer durables, such as cars, furniture and kitchen appliances.

One sector that has fared better than most, however, is the teenage market. “So far it seems teenagers have not cut back on their shopping. Teen-targeted retailers such as Primark, New Look, H&M, Asos and Hot Topic are all weathering the recession better than rivals aimed at an older demographic.” This is a quote from the first of the two linked articles below, which look at this market and its future prospects.

Teenage spenders struggle to learn BBC News (4/8/09)
Hollister: the shop that smells like teen spirit Times Online (5/8/09)

Questions

  1. How is spending on particular products during a recession related to their income elasticity of demand? How does the income elasticity of demand depend on the length of the time period under consideration?
  2. Why has the teenage market been less susceptible to the recession than many other markets?
  3. To what extent will being ‘bargain savvy’ be enough for teenagers to survive the recession without having to make substantial changes in spending patterns? Consider the concept of price elasticity of demand in your answer.

22nd November marks the day when Americans celebrate Thanksgiving Day. However, the cost of this celebration has increased by 11% in the last year according to figures from the American Farm Bureau Federation. One of the main causes of this is the rise in turkey prices but other factors were important as well.

Thanksgiving dinner cost ‘up 11%’ BBC News Online (16/11/07)

Questions

1. Using supply and demand analysis, illustrate the price changes for turkeys identified in the article.
2. Consider possible factors that may have led to the price changes for turkeys identified in the article.
3. Discuss the likely change in the quantity of turkeys demanded as a result of the price rise.
4. What is the likely approximate value of the cross elasticity of demand for cranberry sauce with respect to the price of turkeys?

January 2007 saw unseasonably cold weather in California and the big freeze that occurred may have destroyed up to 70% of the Californian orange crop. Prices as a result of oranges are likely to treble in US shops. The impact on prices elsewhere in the world may be less, but is still likely to be significant as California is an important area in global terms. Oddly the price of orange juice is unlikely to be affected as very few of the Californian oranges go for turning into juice. The majority of oranges for juice are grown in Florida.

Big freeze sours US orange crops BBC News Online (17/1/07)

Questions

1. Using supply and demand diagrams as appropriate, explain the impact of the freezing weather in California on the world price of oranges.
2. Using supply and demand diagrams as appropriate, compare and contrast (a) the change in the price of oranges and orange juice and (b) the change in the price of oranges in the USA and the rest of the world..
3. Examine the likely impact of the cold weather in California on prices of other foods.