GROUP PROJECT 1

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Utah Valley University *

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Economics

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Jun 18, 2024

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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

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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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7 Net earnings at Canada's three biggest grocery chains Note. Bar chart for comparison of net earnings on 2022, 2021 and 2019 of the three Canada’s biggest grocery chains. From Soaring food prices, record profits prompt questions about Canada's 'cosy oligopoly', by P. Moran, 2022 ( https://www.cbc.ca/radio/thecurrent/canada-food-price-profits-1.6629854 ). Copyright 2022 by CBC Radio. Figure 3 Demand and supply curve for food from big grocery chains

8 Note. Demand and supply curve for food from big grocery chains. Own elaboration. Energy Market Gasoline and energy prices According to the global macro models used by Trading Economics and industry analysts' estimates, the price of a liter of gasoline in Canada is forecast to reach 1.30 CAD by the end of this quarter. According to the economic models we have available, we anticipate that the price of gasoline in Canada will average approximately 1.57 CAD/Liter in 2023 and 1.69 CAD/Liter in 2024 (Trading economics, 2022) Figure 4 Canada Gasoline Prices

9 Note . Bar Chart of quarterly Gasoline prices. From Gasoline Prices in Canada increased to 1.23 USD/Liter in October from 1.18 USD/Liter in September of 2022, by Trading Economics ( https://tradingeconomics.com/canada/gasoline-prices ). Copyright 2022 by Trading Economics. The energy price for homes is 0.156 CAD per kilowatt-hour (kWh), while the price for companies is 0.128 CAD per kilowatt-hour. This price includes all aspects of the electricity bill, including the cost of power, distribution, and taxes. As a point of reference, the average price of electricity worldwide during that time was 0.190CAD per kWh for homes and 0.183CAD per kWh for enterprises. However, on the chart, we only present two data points because we calculate multiple data points at v various levels of electricity use for both homes and enterprises. The number shown for households is based on the typical electricity a family uses over an entire year. The data point given here uses 1,000,000 kWh in annual usage for commercial establishments. Figure 5 Canada electricity prices

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10 Note . Canada Electricity price of household and business per kilowatt hour From Canada electricity prices, by Global Petrol Prices. ( https://www.globalpetrolprices.com/Canada/electricity_prices/ ). Copyright 2022 by Global Petrol Prices. Moreover, the change in prices is different from the consumer price index. Gas and energy prices are driven higher by the interaction between market supply and demand. Since the conflict between Russia and Ukraine started, gasoline prices have risen. Thus, the quantity demanded decreased due to a higher cost. In addition, the costs of state and federal taxes, acquisition, processing of crude oil, and the distribution and marketing of gasoline are all accounted for in the price of petrol (Mallees, 2022). Demand and supply of gasoline and energy Gasoline price was 13% percent higher than last year. The primary driver of high gas is the price of crude oil, which is used in making gasoline, which costs 75% more than in May 2021 (Mallees, 2022). Gas supply restrictions increased due to the sanctions placed on Russia for its invasion of Ukraine. Russia is a significant producer of crude oil. Therefore, its exclusion from the world market has driven up prices since the attack that started last year. Even though the price of gasoline is still high worldwide, it fell more than seven percent during September. According to the Statistics of Canada, falling gasoline prices were impacted by an increase in the world's supply of crude oil. In August. The supply and demand imbalances have also caused the prices to move in the opposite direction. The prices also shifted in the opposite direction due to imbalances in supply and demand. Figure 6 Monthly change of gasoline prices (percentage)

11 Note . Gasoline percentage chart form September 2019 to September 2022 Monthly Change in gasoline prices (percentage), by Statistics Canada ( https://www150.statcan.gc.ca/n1/daily-quotidien/221019/cg-a003-eng.htm ). Copyright 2022 by Statistics Canada. The elasticity of gasoline and energy Due to the continuous rise in the price of gasoline, goods and services continue to get more expensive, and there are only a few substitutes that we can take to lessen the consumption of gas. For example, instead of using gas-fuelled vehicles, we can use automobiles that operate using alternative energy such as electricity. Still, if the infrastructure for charging these vehicles is not widely established, only some can use this option. Not all people use electric cars as well, and it would be much more expensive to buy a new one. "Necessity goods" are a subclass of everyday items that include gasoline. Consequently, even though the product becomes more expensive, limiting consumption is challenging. Because the commodity is necessary for many daily tasks. Households can cut their gasoline usage and look for substitutes, but overall, gasoline is still needed. Gasoline is challenging to substitute and necessary to many citizens for daily life. Considering these factors, we can say that demand is inelastic for gasoline (Eitches & Crain, 2016)

12 The electricity demand is also inelastic because it has limited close substitutes. More than a billion people now have access to electricity as of 2010. As a result, 90% of people on the earth were connected in 2019 (The World Bank, 2021). Therefore, even if the price of electricity goes up, the demand for this will remain constant as 90 percent of the planet's population uses electricity. Suppliers of gasoline and electricity has the power to pass the higher cost to consumers since a monopolistic firm owns most necessities like these. Unregulated monopolies can set prices and exercise market power. Small Independent Grocery Stores vs Big Grocery Stores This section will explore the differences between two grocery stores, an extensive retail grocery chain, and an independent grocery store. The two stores have different strategies for their products, customers, and prices. The main difference between these two stores is that the big retail grocery chain has much more money to spend on advertising than the independent store. This gives them a competitive advantage over the independent store because they can advertise their products to more people. The retail industry is an essential part of the economy, and grocery stores are a part of this. One way to compare the benefits of big grocery stores vs. small independent grocery stores is to look at elasticity. This measure of how responsive demand for a product will be to changes in price is called elasticity. When we look at elasticity, it becomes clear that small independent grocery stores are better for consumers because they have a higher elasticity than big grocery stores (Hoch, 1995, p.17). Furthermore, when we examine economics and monopoly, we see that small independent grocery stores are better than big ones because they offer more competition. Smaller companies can also provide more personalized service than more prominent ones, which means they can be more responsive to customer needs (Loria, 2017). Major grocery chains have enough control over their supply chains to pressure suppliers to keep prices low. This is because of their monopolistic power in the market. Small independent grocery stores

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13 cannot compete with big grocery stores because they don't have the same resources and cannot offer the same prices as big grocery stores. In the past, when a small independent grocery store would have to compete with a big grocery store, the small grocery store would have to lower its prices. This is called elasticity of demand. However, today big-box stores offer their most attractive discounts on big-ticket items, undercutting specialty stores and smaller retailers. The small independent grocer must get creative and find ways to stay in business by seeing what they do best and doing it better than anyone else (Kopp, 2022). Big-box retailer A big-box retailer is a type of retail store that stocks an extensive range of products under one roof. They are typically huge stores with many departments and aisles, and the products are often sold at lower prices than in other retail formats. Some people believe shopping at big-box retailers is worth it because they can buy bulk and save money. Others believe that shopping at these stores isn't worth it because the low prices are offset by higher transportation costs to get the product home. The price of a product is only sometimes the deciding factor for shoppers. Some individuals are ready to spend a higher price for a product that they know was manufactured with care and quality. (Kopp, 2022). Some people have argued that large retail stores have an unfair advantage over smaller independent stores because of their economies of scale. They can offer lower prices on goods than smaller retailers because they produce more goods, which means they can buy in bulk at a lower price and pass those savings on to their customers. This makes it hard for small independent stores to compete with larger retailers on price alone, but possible. Smaller retailers can still compete with larger ones by focusing on providing products that customers cannot get anywhere else or by providing customer service that is unmatched by larger stores.

14 Conclusion With the changing dynamics between the demand and the supply, the point of equilibrium is a necessity for both the supplier and the consumer. Though the major shareholders or the major companies in the market drive the price, but it is also the fact that how elastic a product is, which becomes the deciding factor, if it's worth it or not. As observed from the cases that the report presents, it is the elasticity of the product that decides if there will be a demand for it or not. And if there will be, we could plan different strategies with regards to its pricing, endorsement, and even if the marginal cost is worth the extra product. Food or groceries are elastic in nature which means as a consumer, we have the liberty to switch to a product that meets out budget as well as the demand but when there are inelastic like gasoline and energy, the consumer has no other choice but to accept the terms and conditions as set by the producers. References Bowman, G. & MacMahon, M. (2022, October 29). Food prices to rise due to weak Canadian dollar: expert . CityNews Vancouver. https://vancouver.citynews.ca/2022/10/29/canadian-dollar-affect- food-prices/ Eitches, E. and Crain, V. (2016). Using gasoline data to explain inelasticity. Beyond the Numbers: Prices and Spending , 5(5). https://www.bls.gov/opub/btn/volume-5/using-gasoline-data-to-explain- inelasticity.htm Evans, P. (2022, October 19). Food keeps getting more expensive even as overall inflation slows. CBC News. https://www.cbc.ca/news/business/canada-inflation-1.6621413 Gary, S. (2022). Freezing grocery prices is not a solution [news article]. Canadian Points of View Reference Centre. https://www.ebsco.com/products/research-databases/canadian-points-view- reference-centre Greenlaw . S. Income Elasticity, Cross-Price Elasticity & Other Types of Elasticities .

15 https://courses.lumenlearning.com/wm-macroeconomics/chapter/income-elasticity-cross-price-elasticity- other-types-of-elasticities/ Global Petrol Prices (2022, March). Canada electricity prices. prices https://www.globalpetrolprices.com/Canada/electricity_prices Hoch, S. J., Kim, B.-D., Montgomery, A. L., & Rossi, P. E. (1995). Determinants of Store-Level Price Elasticity. Journal of Marketing Research , 32(1), 17–29. https://doi.org/10.2307/3152107 Kopp, C. M. (2022). Big Box Stores vs. small retailers. Investopedia. https://www.investopedia.com/financial-edge/0212/big-box-stores-vs.-small-retailers.aspx Korstrom, G. (2022). Food inflation jumps to its highest level in nearly 13 years: Pandemic-related supply-chain disruptions are prime drivers of the increase. Business in Vancouver , 1695, 4–5. Krugman, P., Wells, R. & Graddy, K. (2013) Essentials of Economics, 3rd Edition: Krugman Worth Publishers. ISBN: 9781429278508 Chapters 3, 4 and 5 Loria, K. (2017). How small grocery stores can compete with big boxes. Grocery Dive. https://www.grocerydive.com/news/grocery--how-small-grocery-stores-can-compete-with-big- boxes/535373/ Mallees, N. (2022, May 24) As the cost of gas climbs, here's what's fuelling the price at the pump. CBC News. https://www.cbc.ca/news/business/gas-prices-explained-2022-1.6460817 Moran, B. (2022. October 26). Soaring food prices, record profits prompt questions about Canada's 'cozy oligopoly'. CBC Radio. https://www.cbc.ca/radio/thecurrent/canada-food-price-profits- 1.6629854 Punchard, H. (2022, September 20). Majority of Canadians are making changes to their grocery store habits amid higher prices. BNN Bloomberg. https://www.bnnbloomberg.ca/majority-of- canadians-are-making-changes-to-their-grocery-store-habits-amid-higher-prices-1.1821231 Statistics Canada (2022). Monthly Change in Gasoline Prices. https://www150.statcan.gc.ca/n1/daily- quotidien/221019/cg-a003-eng.htm

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16 The Investopedia Team. (2022, August 30). Price Elasticity of Demand Meaning, Types, and Factors That Impact It . https://www.investopedia.com/terms/p/priceelasticity.asp The World Bank. (2021, June 07) Report: Universal Access to Sustainable Energy Will Remain Elusive Without Addressing Inequalities . https://www.worldbank.org/en/news/press-release/2021/06/07/report-universal-access-to- sustainable-energy-will-remain-elusive-without-addressing-inequalities Trading Economics (2022). Canada Gasoline Prices - October 2022 Data - 1992-2021 Historical - November Forecast. https://tradingeconomics.com/canada/gasoline-prices Figures references Figure 1. Evans, P. (2022). Line chart for comparison of monthly per cent change in CPI and food price. Food keeps getting more expensive even as overall inflation slows. ( https://www.cbc.ca/news/business/canada-inflation-1.6621413 ). Figure 2. Moran, P. (2022). Bar chart for comparison of net earnings on 2022, 2021 and 2019 of the three Canada’s biggest grocery chains. Soaring food prices, record profits prompt questions about Canada's 'cozy oligopoly'. ( https://www.cbc.ca/radio/thecurrent/canada-food-price-profits- 1.6629854 ). Figure 3. Demand and supply curve for food from big grocery chains. Own elaboration. Figure 4. Trading Economics (2022). Bar Chart of quarterly Gasoline prices. Gasoline Prices in Canada increased to 1.23 USD/Liter in October from 1.18 USD/Liter in September of 2022. https://tradingeconomics.com/canada/gasoline-prices Figure 5. Global Petrol Prices (2022). Canada Electricity price of household and business per kilowatt hour From Canada electricity prices. ( https://www.globalpetrolprices.com/Canada/electricity_prices/ ).

17 Figure 6. Statistics Canada (2022). Gasoline percentage chart form September 2019 to September 2022 Monthly Change in gasoline prices (percentage). ( https://www150.statcan.gc.ca/n1/daily- quotidien/221019/cg-a003-eng.htm ). Table references Table 1. Evans, P. (2022) Percentage increase in food price from September 2021 to September 2022. Food keeps getting more expensive even as overall inflation slows. ( https://www.cbc.ca/news/business/canada-inflation-1.6621413 ). Summary of the Group project Questions: Q1. What work did you do in the group project? What did you contribute in the group?

18 Q2. What percent of work did you do? Q3. Rate your contribution in the team 1-10 (10 being as very engaged). Please fill in the table. Name of Group Member Please write your answer of above 3 questions Angelo Miguel Cataluña A1. Providing ideas regarding our article specifically for energy market and gasoline price changes. A2. my team has a much higher percentage than mine because they help me do the proper citations. A3. 10 Ka Yan Sung A1: Providing ideas and overall directions for the report; completing the part for “Food Market” A2: Same % as others because our workload is evenly distributed A3: 10 (very engaged) Simran Sandhu A1: Write the abstract and conclusion, share the workload about recommendation with Uday and help Victoria in cross checking the references. A2: Same as anyone in the group. A3: 10 Uday Pratap Singh Katoch

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19 Victoria Fernanda Angulo Pimentel A1: Providing ideas for article; completing the introduction, checking references, APA format and citation. A2: Checking and correcting everyone's parts, adding comments on how they could improve them. A3: Same % as others. 10 (very engaged) Yash Indru Malkani A1: Providing article concept, finishing the "Small Independent Grocery Store versus Big Grocery Store," and assisting Uday with citation A2: Same % as others A3: 10 (very engaged)

GROUP PROJECT 1

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