Own Price Elasticity of Demand

/in /by

 

Grading Rubric:

 

Economic Thinking,
  1. All relevant economic concepts are explained and fully integrated into the discussion.
  2. Positive economic analysis is applied.  Economic strategies and policies are evaluated, solutions are proposed and fully analyzed.
  3. Information is synthesized from multiple sources, if applicable. 
  4. Statements are convincing and target the proposed audience.
  5. The central message is compelling (precisely stated, appropriately repeated, and strongly supported.)
  6. Personal experience (reflection)  is discussed and fully integrated into the project.

 

 Points: (…/4)_____________

 

 

 
Evidence of civic engagement,  global responsibility, cultural understanding, and personal growth

 
  1. Submits evidence of adjustment in own attitudes and beliefs. Demonstrates understanding of global economic trends and imbalances. Directly applies new skills and knowledge to solve a community problem.

       

      Points: (…/4)_____________

 

 

 

 

 

 

 
Clarity and Organization
  1. Proper citations are inserted (APA formatting).
  2. Acknowledges all image and multimedia sources with captions and annotations.
  3. A reference section is complete (APA formatting).
  4. The sequence of information is logical and intuitive, paths to all information are clear and direct.
  5. Posts are visually appealing: Format, use of fonts and highlighting is appropriate and enhances the readability of the paper.
  6. A title page is included.
  7. Includes a short introduction and a conclusion in each topic.
  8. Uses at least500 words per topic.

 

 

 Points: (…/4)_____________

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reminder: Academic Integrity:
Students and employees at Oakton Community College are required to demonstrate academic integrity and follow Oakton’s Code of Academic Conduct. This code prohibits:

 

●      cheating,

●      plagiarism (turning in work not written by you, or lacking proper citation),  Assignments may be submitted using Turnitin suite of tools that provide instructors with information about the authenticity of submitted work,

●      falsification and fabrication (lying or distorting the truth),

●      helping others to cheat,

●      unauthorized changes on official documents,

●      pretending to be someone else or having someone else pretend to be you,

●      making or accepting bribes, special favors, or threats, and

●      any other behavior that violates academic integrity.

 

There are serious consequences to violations of the academic integrity policy. Oakton’s policies and procedures provide students a fair hearing if a complaint is made against you.  If you are found to have violated the policy, the minimum penalty is failure on the assignment and, a disciplinary record will be established and kept on file in the office of the Vice President for Student Affairs for a period of 3 years.

 

Please review the Code of Academic Conduct and the Code of Student Conduct, both located online at www.oakton.edu/studentlife/student-handbook.pdf.

 

 

 

 

 

 

 

 

 

 

 

Your project should include:

 

  1. Background information – introduction.

 

 

Pick the local area you will study (for example, Skokie, Northbrook…), and explain the purpose of this project (report). You may take some information from the project objectives.

 

Project Objectives:

 

You are planning to open a small business (grocery store, small restaurant, etc.) employing a community-minded, and mutually sustainable business model. You feel strongly about giving preferential treatment for local food growers to support the surrounding economy and provide consumers with fresh and nutritious food. Please note, we are not going to discuss organic food vs. non-organic. Organic food is supplied by big-box businesses. Our goal is to restructure the food system and buy from small and sustainable farms if it is possible.

 

Although modern industrial food production is efficient, productive, and reliable, there are several negative consequences of this system.

 

  • Processed foods, meat, and dairy products are relatively cheap, but overconsumption of processed foods and mead has been linked to obesity, heart disease, and cancer. Low-income families reported higher rates of diet-related health problems because of the higher cost of a more nutritious diet.

 

 

A new study shows, investors are not willing to give up premiums for societal benefits. (Larcker, David F. and Watts, Edward, Where’s the Greenium? (February 12, 2019). Rock Center for Corporate Governance at Stanford University Working Paper No. 239. Available at SSRN: https://ssrn.com/abstract=3333847 or http://dx.doi.org/10.2139/ssrn.3333847)

 

The main goal of this report:

  1. Communicate the competitive advantages of local food systems to key stakeholders.
  2. Propose business strategies that will make your business attractive to prospective lenders.
  3. Outline possible challenges and propose your solutions.

 

Sources I recommend:

 

  1. Factory Farming
  2. CMAP – local sustainable food system
  3. Food Matters, Film
  4. Why Study The Food System
  5. The true cost of fast food

 

 

 

 

 

 

 

 

Module I

 

  1. Chapter 1 – Ten Principles of Economics (Pay attention to one concept: How People Make Decisions).

 

  • Introduce the topic.

 

  • Will consumers buy your products or they prefer low-cost big-box businesses?

In this chapter, we will study how individuals make decisions.  In our case, we will discuss if consumers prefer factory-farmed products or they are willing to pay more for locally sourced and sustainable foods. What is shaping consumer incentives?

 

We will start our studies by outlining MB (marginal benefits)  and MC  (marginal costs) to consumers.

 

You may  outline your thoughts in the table —  see below (feel free to modify the tables) — and  add as much information as you think necessary to evaluate consumer incentives:

 

Consumers
Factory Farmed Food (or processed food)
Benefits Opportunity Cost
For example, convenience, Take a look at this site:

https://www.healthline.com/health/fast-food-effects-on-body

Please note that consumers do not think about the cost of production.
 

 

Locally Grown and Sustainable Food

Benefits Opportunity cost
   

 

 

  • Next step, How do you think your business will benefit from selling local and sustainable foods?

Outline your MB (benefits)  and MC  (costs) for serving local and sustainable foods vs. processed food. Keep in mind one point: why should investors support your project?

 

Your Business
Factory Farmed Food (processed food)
Benefits Opportunity cost
   
 

Locally Grown Sustainable Food

Benefits Opportunity Cost
   

 

 

 

 

 

 

 

 

  • Discuss the costs and benefits to society (local community).

 

Society
Factory Farmed Food (processed food)
Benefits Opportunity Cost
  Please note that individuals (sellers and consumers) do not consider the cost of environmental damage.

 
Locally Grown Sustainable Food
MB MC
For example, local area income and quality of living.

https://www.cdc.gov/media/releases/2017/p1005-rural-suicide-rates.html

 

  

 

  • Your conclusion: How can you use this information?

 

  1. What can you tell about consumer incentives in the area you study to buy locally grown and sustainable food?

 

Discuss how income and time constraints affect consumer incentives. What else do you think will affect consumer decisions to buy healthy and nutritious food from you?

 

 

 

 

How can your business affect consumer preferences (motivations)? Listen to these talks and see if you can use this information to convince your consumers and investors that your product is superior to the product your competitors sell:

https://www.youtube.com/watch?v=9X68dm92HVI

https://www.youtube.com/watch?v=PPQhj6ktYSo

https://www.youtube.com/watch?v=wfcro5iM5vw

 

 

  1. Why do you think investors may want to support your project?

 

 

  • Sources you used.

 

 

Note: We will not use Chapter 2 concepts in the project.

 

III. Chapter 4 – The Market Forces of Demand and Supply.

 

  • Introduce the topic. Study if your local community will support a locally-owned, community-sourced, socially responsible, environmentally sensitive business, or consumers will prefer lower cost big-box businesses?

 

 

  • Evaluate Market Demand for locally grown and sustainable food in the local market you study (Skokie, Northbrook, …).

 

 

 

 

 

 

Non-Price Determinants of demand

For Locally Grown and  Sustainable food
List non-price determinants of demand Provide data (local area statistics)  and your discussion  
     
     
     

 

Design a plan to boost the demand for the products you will sell.

 

 

  • Study if everyone in the community has access to locally grown and sustainable food.

 

Supply (number of sellers)
Locally grown and sustainable food, sellers Factory Farmed, Processed Food, sellers
   
   

 

 

  • Your conclusion: Do you think the demand for factory-farmed products is high and rising? What can you tell about the demand for locally grown and sustainable food? What forces affect the supply of locally grown food? How can you use this information to raise the demand for local and sustainable food? What changes in public policies will you support? Keep in mind your goal: convince investors your business proposal is viable.

 

Do not summarize various sources of information and policies you may be able to find online. Outline your original thoughts.

 

 

 

  1. Chapter 5 – Elasticity and its Application (Pay attention to the own-price elasticity of demand).

 

  • Introduce the topic.

 

  • The own-price Elasticity of Demand
Evaluate the own-price elasticity of demand for Determinants of the own-price elasticity of demand and  your discussion
Small producers and retailers selling sustainable food vs.

 

Big-Box retailers selling factory-farmed foods

 Determine, whether your business will be facing relatively elastic or relatively inelastic demand (more elastic or less elastic demand).

 

My Summar

 

  • Your conclusion: What can you tell about the price elasticity of demand for the products you are going to sell vs. factory-farmed foods? How does elasticity affect your pricing decisions (see “the own-price elasticity of demand and total revenue”)? What strategies you may employ to make demand less elastic?

 

Use what you learned about the own-price elasticity of demand to answer the following question: How do food laws and regulations affect small and sustainable farms (think about the effect of the policies on supply and quantity supplied)? How does it affect your business? What changes in public policies will you support?

 

Keep in mind your goal: convince investors your business proposal is viable.

 

Do not summarize various sources of information and policies you may be able to find online. Outline your original thoughts.

 

 

  • Sources you used.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Module II: Market Efficiency, Market Failure, Government Failure.

 

The problem we face is overproduction (and overconsumption)  of factory-farmed products. Is it government failure or market failure?

 

We will focus on three types of market failure:

  • negative external effect – chapter 10;
  • market power (market concentration) – see the notes;
  • common and public goods – chapter 11.

 

  1. Chapter 7 – Consumers, Producers, and the Efficiency of Markets (pay attention to the last section, Market Failure).

 

  • Introduce the topic. Define productive efficiency, allocative efficiency, market failure.

 

  • In chapter 7, we will learn about allocative efficiency. You need to discuss if the current food system is efficient from society’s perspectives. Compare the current market equilibrium in the market for factory farmed products with a socially optimal equilibrium. Do you think socially optimal demand and supply in this market should be higher or lower?  Use the demand and supply graph to illustrate your answer.  Mention the concepts of consumer and producer surplus and deadweight loss.

 

  • Your conclusion: How will your business improve the efficiency of the food system? Why do you think the local community (local government) may support your business plan? Do not summarize various sources of information and policies you may be able to find online. Outline your original thoughts.

 

  • Sources you used.

 

Chapter 10 – Externalities ( we will focus on one negative external effect – food loss and food waste).

 

  • Introduce the topic.

 

  • List the negative external effects of industrial food production.

 

Find how much a current food system contributes to food loss and food waste. Food waste is a significant source of greenhouse gas emissions.

 

Interesting facts:  Illinois landfill capacities report. 

Let us pick one landfill, Advanced Disposal Services Zion Landfill, they received 2,203 tons per day in 2013.

 

“Fourteen million tons of waste is landfilled in Illinois every year. Food waste accounts for almost 20 percent of those 14 million tons, which is more than any other single waste stream found in landfills. When food waste decomposes, it produces methane, a powerful greenhouse gas that is 25 times more harmful than carbon dioxide.”

https://www2.illinois.gov/epa/topics/waste-management/Pages/food-waste.aspx

 

The mass of an adult African elephant is approximately 5 tons, how much food waste if measured in African elephants, do we dispose of every year in IL only?

 

 

Present local area statistics on food loss and waste, indicate places that generate the most waste.

 

Find out how supermarkets and restaurants in the area you study manage food wastes. What incentives to recycle, donate, and compost food scraps do they have?

 

  • Your conclusion: How will your business address the problem of the negative external effects — food loss and food waste?  (Example:  Freshpick, Irv & Shelly’s Fresh Picks: Freshpicks, simplifies the supply chain and reduces food loss, or you may donate food, purchase composters to recover food loss).  Describe your marginal benefits and costs from the actions you propose.

Why do you think the local community (local government) may support your business plan? Do you think investors will support your plan? Why?

 

Do not summarize various sources of information and policies you may be able to find online. Outline your original thoughts. Avoid normative analysis.

 

 

  • Sources you used.

Factory Farming and Environment

  1. Animal Agriculture and Climate Change | This video may change your life, for good!
  2. The Sustainability Secret
  3. The Truth Behind “Humane” Labels

 

Food Loss and Waste

Wasted – How America Is Losing Up to 40 Percent of Its Food from Farm to Fork to Landfill (PDF)

 

 

 

 

Market failure – Concentration of Market Power (Market Concentration) – no chapter, see class notes.

 

  • Introduce the topic.

 

Farmers’ markets are perfectly competitive. Competition increases the own-price elasticity of demand.  It means, farmers have to cut prices and raise quantities sold to raise their total revenues. Small farmers cannot afford it.

 

Strategy #1: Farmers and food sellers may consolidate their market power and form large businesses to reduce the cost of production, and benefit from economies of scale, increase market share to raise the quantities sold.  This strategy creates natural monopolies in the food industry.

 

For example, Unilever owns brands: Becel, Brummel & Brown, I Can’t Believe It’s Not Butter, Butter Imperial, Promise, Shedd’s Spread Country Crock. 

 

Farmers and food sellers may adopt a different strategy:

Strategy #2. Use sustainable methods of production, educate consumers, and advertise products to reduce the elasticity of demand; adopt new technologies to cut costs and do not compromise on quality.

 

Anyway, farmers, food producers, and food sellers have incentives to merge and consolidate market power to cut costs.  It seems it is inevitable to have large food producers in the market. However, if consumer tastes and preferences change, farmers will have to employ sustainable methods of production, and smaller and more flexible sellers will be more viable since they can quickly adapt to changes in consumer tastes and preferences.

 

Also, with more economic freedoms, small sellers will be able to compete with large businesses.

Ways to cut transaction costs: How capitalists can create value by reducing waste

 

 

Use the sources listed below to find more information about market concentration (limited competition) in the U.S. food industry, and analyze the outcomes.

 

 

Sources I  recommend:

 

 

 

Answer the questions:

 

  1. What did you learn about market concentration in the U.S. food industry? What are the reasons for mergers and acquisitions in the food industry?
  2. How does the market concentration in the U.S. food industry  affect:

 

  • Quality – the nutritional value of food produced,
  • Local farmers,
  • The Environment – Food Waste,
  • Business transparency (being open, honest, and straightforward about various company operations),
  • Consumer Choices,
  • Animal Welfare,
  • Employment and wages,
  • What can you tell about the rent-seeking behavior of large food producers? (What is ‘Rent-Seeking’? Rent-seeking is the use of the resources of a company, an organization or an individual to obtain an economic gain from others without reciprocating any benefits to society through wealth creation. An example of rent-seeking is when a company lobbies the government for loan subsidies, grants, or tariff )

 

 

  • Your conclusion: What strategy will your business adopt to stay profitable in the food retail business? What challenges will you face? What changes in public policies will you support? Keep in mind your goal: convince investors your business proposal is viable.

 

 

 

  • Sources you used.

 

If you wish to learn more about monopolists and possible regulations, you may submit an extra point project that is posted in the Assignments section of D2L.

 

 

 

 

 

 

 

 

 

Chapter 11: Market failure — Common Goods, Public Goods.

 

  • Introduce the topic: Rival, Non-Rival, Excludable- Non-Excludable, Different types of goods.

 

 

Explain inefficiencies associated with public and common goods.

 

Let us think about one problem you try to address — food loss and food waste.

 

Can you explain why waste collection service, public composting facilities, and a clean environment are common goods?

 

Discuss inefficiency associated with common goods (the Tragedy of the Commons).  Think about how you in your household dispose of waste. Do you sort waste? Do you care how much waste you dispose of? Do you consider composting? Do you see overfilled garbage bins?

 

Markets work well for private goods. But, as soon as we move away from private goods we start to see market failures that vary widely in the degree of the failure. Can we privatize or restructure the garbage collection service?

 

Let’s take  Midwest Organics Recycling. The company is accepting organic wastes and converting it into compost. However, they do not purchase waste, consumers subscribe to their service and pay a monthly fee. This program makes their service a common good, not a private good. We know that private markets allocate private goods efficiently. Can we privatize waste collection and waste composting services? Many companies started offering buy-back programs. It converts common goods (waste collection service) into a private good. Why do you think this approach will be more efficient?

 

Your conclusion: Use your knowledge about common goods, public goods, and private goods to suggest how your business will make the food disposal service more efficient? What challenges will you face? What changes in public policies will you support? Will investors support your project?

 

Remember, you prepare your report for the prospective investors.

Do not summarize various sources of information and policies you may be able to find online. Outline your original thoughts.

 

 

  • Sources you used.

 

 

 

  1. Chapter 6 — Supply, Demand and Government Policies,

 (we will discuss Government Failure)

 

  • Introduce the topic – government failure.

 

  • Illustrate how government regulations, such as ethanol subsidies (cotton, rice, or corn subsidies), farm subsidies, and other regulations affect small farmers, the variety of farm products in the market, local food systems, and discuss the environmental impact of the regulations. Use the market model of demand and supply to illustrate the effect of regulations.

 

  1. You need to pick at least one  federal regulation, for example,

 

Ethanol subsidy:

https://economics21.org/html/ethanol-mandates-need-go-1736.html

 

Diary subsidy:

https://www.investors.com/politics/editorials/dairy-subsidies-government-farm-programs-surplus-cheese/

 

Who gets subsidies?

https://www.forbes.com/sites/adamandrzejewski/2018/08/14/mapping-the-u-s-farm-subsidy-1-million-club/#40b0afd73efc

 

 

  1. Study local regulations that create market inefficiency

 

Illinois Tax Hits Family Farms

Illinois Tax Code Favors Corporate Farms

 

Additional Sources I recommend:

Everything I Want to Do is Illegal.

Book: Everything I Want to Do is Illegal.

Film, Farmageddon

Blog Agrarian Liberty, Safe food at any cost

 

 

 

 

 

 

  • You may want to read this report by Michael Waltz, ECO 202 H07, Fall 2019.  Michael interviewed a local farmer.

“While the government provides millions of dollars in tax subsidies to the farming industry, it is not an equal playing field. These tax dollars go to an estimated ten percent of all farms in the United States, known as the “Monocrop Giants.” These farms grow only one crop, and do so with factory-like operations. These farms maintain a monopoly on government funding, preventing small, family farms from monetary benefits. Farming continues to be unprofitable for a large majority of its workforce. Multiple farmers I spoke with shared their annual profits- they varied between $2,038 and $4,000 per year. As market share has continued to become concentrated and allocated to the largest farms, farming itself has strayed from a business to a passion project. Many farmers continue farming because they want to, or even need to. Citing the “satisfaction of working outside,” and the “higher cost of closing than continuing on,” many farmers feel stuck working sixty-plus hours a week with no financial incentives from profit or the government.

 

I spoke with a small farm owner from Troy, Illinois. Richard, his wife, and his son have operated a farm since 2010. Richard works about seventy hours a week, and says the majority of his annual income comes from sources other than the sale of produce. He credits his side jobs and his wife’s small business with the funding of his family’s daily expenses. Richard says, as a farmer, the biggest competitors for sales revenue are the major supermarkets. Consumers prefer buying from large, national stores, rather than small, family-owned farmers markets. “The massive stores have deals with the mega-farms, so we lose double- the subsidies and the customers!” Richard mostly provides his community with the products of his farm, and is thankful his town’s remote location means store options are limited. His farm receives no government assistance. He is aware of farms that receive grants and partnerships with Universities or organizations, but has not pursued any for himself.

 

One of the largest expenses for Richard’s farm is his tax payment. He believes he is unfairly burdened with tax payments, and the refund process for overpaid taxes is inefficient. He cites six months of wait time before the IRS returns his excess payments. Richard enjoys his farm work, and is thankful for what he can do to get by, but wishes there was less market concentration at the level of the megafarms.”

 

 

 

 

VII. Reflection

 

 

Reflect on your personal experience. Consider the following questions: What are the best things you discovered about your local community? Do you have a different picture of your community than you had before you began your studies? Has your experience expanded your career options? How can you continue your involvement with this group or social issue? How can you educate others or raise awareness about this group or social issue? What are the most difficult or satisfying parts of your work? Why? Identify the question(s) this study has raised for you. What are you still wondering about?

 

 

 

 Extra Points: Library, Learning Center,  1/100

 

Get help from the library, or the Learning Center, and mention it in your project.

 

Library:

https://asklibrary.oakton.edu/, http://researchguides.oakton.edu/c.php?g=152191&p=1001518

 

Learning Center: https://www.oakton.edu/studentservices/learning_center/index.php

 

 

Extra Points, 3/100

 

 

Optional extra points, 3/100: Interview a small local farmer, ask about the difficulties they face, how they handle them,  and what changes in public policies they may propose. For instance, What has been your greatest challenge as a small farmer? Can you think of any change in public policy (regulation) that would help you stay competitive? Do you feel that decisions regarding the operation of your farm are largely left to you? Are there any forces or circumstances that compromise your independence?…