Sunday, December 03, 2006

Grapefruit vs. Gasoline -- Elasticity Illustrated

When I took an introductory economics class in college, one of the most important topics was elasticity, with much discussion of the elasticity of demand (how demand for an item changes as the price changes). Last week's news brought two examples worth sharing.

Grapefruit

The New York Times reported on rising orange juice prices, and included these statistics about grapefruit:

"The orange industry’s problems follow those of the grapefruit industry. The grapefruit crop, which was down substantially last year because of hurricane damage, is recovering somewhat this year. Where last year’s crop was 19 million boxes, this year’s should be in the range of 26 million boxes, Mr. Meadows said.

"But last fall, with the grapefruit crop down substantially, consumer demand for grapefruit juice plummeted by as much as 30 percent after prices increased 20 percent and more."

In other words, a price increase of 1 percent resulted in a demand decrease of 1.5 percent.


Gasoline

The San Francisco Chronicle's David Baker reported on a survey of gasoline prices and purchases. As you would expect, consumers react quite differently to rising gasoline prices than to rising grapefruit juice prices.

"The Davis study examined two periods of rising prices: 1975 to 1980 and 2001 to 2006. In each, it examined the 'elasticity' of demand -- the amount that gasoline use changes as prices rise or fall.

"For every 10 percent increase in price during the late 1970s, demand fell 2.1 to 3.4 percent, researchers found. But in the past five years, every 10 percent price increase drove down gasoline purchases by a mere 0.34 to 0.77 percent."

A 1 percent price increase for gasoline resulted in a demand decrease of between 0.034 and 0.077 percent (30 times less than the change for grapefruit juice), a classic example of inelastic demand. In most parts of the U.S., there is no substitute for gasoline, so people just grumble a bit about high prices and keep driving. To be sure, paying more for one good will affect purchases of other goods, and so the extra money spent on gasoline will prevent expenditures on luxuries like grapefruit juice through substitution of a cheaper juice or abandonment of breakfast juice entirely.

That people responded differently to higher prices in the 1970s than they do today caught my eye. Christopher Knittel, a economist at University of California, Davis and one of the report's co-authors, had this to say about on the difference in demand changes for the two decades:
"We tend to live farther from our jobs now, so if the price of gas goes up, I'm still forced to drive to work," Knittel said. "There's not much discretion."

The difference also could be connected to the rising number of dual-income families. "Now it's two people who can't change their behavior," Knittel said.


Image credits
The grapefruit photo is from Ms. Tea's Flickr collection and the gas pump photo is from Racoles's Flickr collection. Both photos are subject to a Creative Commons License.


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Technorati tags: Food

1 comment:

Pritha said...

hi,

best example of elasticity i've ever seen.

i thought you might like a recipie for a savoury red grapefruit salad (that you can make with pomelo, when in season)to commemorate how cool this post is.

serves four (or one, in my case)

peel, segment and remove the membrane from three red grapefruit. place in bowl. if the segments fall apart during this process, excellent. save the juice in another bowl, you'll need it in a bit. if you haven't any juice from this activity, squeeze some of the segments to make 2 Tbsp. worth.

chop at least two green chilis into fine radial slices. add to grapefruit. if you like heat, add a few more.

if you have jaggery (date palm sugar) soften it or grate it whilst hard. if not, use dark brown sugar. use a level teaspoon of sugar for each grapefruit. Add to bowl of juice. whisk to combine. does take a few minutes.

now for salt: I like fine sea salt, my mother prefers rock salt, ground coarse, my aunt uses Hawaiian salt (because she lives there and why not?). put a pinch of what you like in the bowl.

combine gently, add juice if you have it. you can add some good quality mustard oil (see, grapefruit & gas) that helps to send this dish into the stratosphere with respect to both rounding out and sharpening the flavors. add a teaspoon to start and taste. or you can skip it if you can't find any.

enjoy!

pritha