Economics blog

Price elasticity of demand - soft drinks vs fruit and vegetables.

It's not always easy getting some good examples of price elasticity of demand figures so the results of this comprehensive study into food pricing and health should be useful, not only for elasticity but also for market failure. 

The study analysed data from 32 high-income countries and found that a 10% rise in soft drink prices could decrease consumption by up to 24% - giving a coefficient of (-)2.4, definitely in the "elastic" range.

On the other hand, if fruit and vegetables were subsidised by 10%, consumption would only increase by 8%, giving a coefficient of (-)0.8, which is inelastic.

So what are the reasons for this difference in elasticity? Possible discussion points include

- are consumers more sensitive to a price increase than a price decrease?

- are these results due to the fact that lower income consumers are the ones most likely to be purchasing soft drinks and higher income consumers most likely to be purchasing fruit and vegetables?

- if spending on fruit and vegetables is inelastic, then total spending will fall. Will consumers spend this "extra" income on junk food?

- what other measures could / should be used to encourage consumption of healthy foods and discourage consumption of fatty foods.

As an extension for brighter students, you could ask them to model the above figures on a supply and demand diagram. Have them start off with an individual who purchases 100 cans of soft drink and 50kg's of fruit and vegetables per year, each at a unit price of £2. Below is my effort!


The full article can be found here.

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