GROUP PROJECT 1

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Utah Valley University *

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2010

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Economics

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Jun 18, 2024

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docx

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1 Team Project 1 – Food Prices Rise in face of a week Canadian dollar MBAF 504 – Business Economics 13 November 2022

2 Abstract The basis of this paper is microeconomics, the article focusses on Canadian prices be it food, energy or gasoline. The demand and supply are always dependent on the elasticity of the product. Sometimes, the customer has the advantage of shifting to a new product, but in certain situations, the inelastic nature of the product forces the consumer to accept, however the Market reacts, but in reference to small individual firms. We will focus our paper in explaining how microeconomic variables can affect the market interaction. Keywords: Elasticity, Inelastic, Supply, Demand, decisions by individual firms.

3 Food keeps getting more expensive even as overall inflation slows The article gives us a general overview of Canadian food prices. Despite the recent decrease in the inflation rate, essential goods prices continue to get more expensive. Even though economists had projected a more significant drop-off, the prices have increased, and we are going talk about the possible causes that might be generating this scenario. Though one of the main reasons is inflation, we will take a different approach to how microeconomic variables have also caused this price increase. We will consider the role that big grocery store chains have played in this dynamic and how they affect independent grocery stores, how the elasticity of demand and supply have intervened in the same price increase and how this scenario relates to the continuously changing price in gasoline and energy. (Evans, 2022) Food Market The news article points out that food price in Canada keeps soaring even though the inflation rate has begun to drop. While the inflation rate declined from 8.1% in June 2022 to 6.9% in September 2022 (Evans, 2022), the price of some groceries has increased drastically in the past year, causing food inflation to be higher than the overall inflation rate. There are factors affecting the demand and supply of groceries, so food prices in Canada have risen quickly in the past year. Table 1 Percentage increase in food price from September 2021 to September 2022 Grocery % Increase Cereals 17.9 Baked Goods 14.8 Fresh Fruit 12.9 Fresh Vegetables 11.8

4 Dairy Products 9.7 Meat 7.6 Note. Percentage increase in food price from September 2021 to September 2022. Adapted from Food keeps getting more expensive even as overall inflation slows, by P. Evans, 2022 ( https://www.cbc.ca/news/business/canada- inflation-1.6621413 ). Copyright 2022 by CBC News. Figure 1 Monthly percentage change in CPI and food price since January 2018 Note. Line chart for comparison of monthly per cent change in CPI and food price. From Food keeps getting more expensive even as overall inflation slows, by P. Evans, 2022 ( https://www.cbc.ca/news/business/canada-inflation- 1.6621413 ). Copyright 2022 by CBC News. Supply for Food Over the past year, many significant events have affected the supply chains of food in Canada, resulting in a shift in supply in the food market. Food manufacturers' production cost has escalated, and the manufacturers would increase their wholesale prices to grocery stores. Eventually, grocers pass the

5 higher costs to shoppers. As the cost of production increases, the supply curve shifts up to a new price level. The significant events imposing a burden on the food manufacturers in the past year include Russia-Ukraine disrupting the distribution channel of some global commodities, Covid-19 leading to shut down of production plants, the surge in the gas price increasing the cost of shipping and transportation of goods (Korstrom, 2022), climate disasters like the flooding in British Columbia, drought condition in Western Canada (Sands, 2022), weak Canadian dollar affecting the cost of imports (Bowman & MacMahon, 2022). Demand for Food For the food demand, some forces shift the demand curve in different directions, causing the demand to remain still. On the one hand, the Canadian government has input spending to accelerate the recovery of the national economy from the impact of Covid-19. Together with years of low-interest rates, the Canadian government has been able to keep real estate markets and stock markets vibrant. Some Canadians have benefited from it and created wealth to spend more money on food (Korstrom, 2022). This results in higher demand for food. Furthermore, some Canadians predict that the growth of food prices will continue, and they have changed their lifestyle to help save money on groceries. Some Canadians buy less food, skip meals, start at-home farming, and the like (Punchard, 2022). The change in people’s tastes and lifestyles results in lower demand for food. It is believed that the combined effect of the above factors will not hugely impact the demand for food, keeping the demand curve unchanged. Price Elasticity for Food Even though the cost of production for grocery stores increases, the biggest grocery chains manage to pass along the higher costs to consumers and make more profits compared with 2019, the pre- pandemic period (Moran, 2022); it is believed that for food bought from big grocery stores, the demand is

6 more inelastic than supply. After all, food is a necessity, and people consume food on a daily basis. Substitutes are available for each type of food product. However, overall, most food products face the challenges of supply chains, so consumers do not have many affordable options. Hence, producers (big grocery chains) can pass a large portion of the cost increase to consumers (the shoppers) and even raise prices more than they need to exploit profits. As shown in Figure 6 below, the supply curve shifted upwards due to the increased cost of production and producers’ desired profit. The new equilibrium quantity was reduced from Q0 to Q1 , while the new equilibrium price was raised from P0 to P1 . Since the demand is inelastic (the demand curve is steeper than the supply curve), the consumers absorbed most of the increased costs and desired profits. The percentage increase in price is more significant than the percentage decrease in quantity (Area A2 is larger than Area A1 ). The amount consumers spent on food from big grocers eventually increased. Figure 2

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