Week 10_ Thursday, November 17, 2022

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Apr 3, 2024

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Week 10: Fat Economics, Crime and Punishment The Market(s) for Food ● Market - Demand (buyer, consumer) and Supply (seller, producer) ○ Demand: consumer individual preferences, social influences, government policies ○ Supply: Input prices (costs), food processing technology, competition, government policies Food Prices: Volatility ● Question: are food prices volatile? Are their demand and supply elastic or inelastic? ● Demand: as basic necessities, demand will be relatively inelastic ● Supply: relatively inelastic ● Production takes time and depends on weather and political factors which can be unpredictable ● With both demand and supply inelastic, prices will be relatively volatile when there are shifts in demand and/or supply The Relative Price of Food ● Food prices have gradually escalated over time , but higher prices may not have deterred people from eating more because the prices of everything else, along with people’s nominal incomes, have outpaced food prices ● Compared with all the goods and services a family must purchase, food–relatively speaking–may have been quite a bargain , especially in the last few decades ● Various studies agree that lower relative food prices provide a partial explanation for Americans’ enlarging waistline over the past thirty to fifty years ● The rise in the obesity rate during the past four decades can be partially attributed to the significant drop in the relative price of food, a 17% decrease between its peak in 1975 to its low in late 2000. Then, in the 2000s, as relative food prices rose 5%, the rise in obesity rate for adults slowed and the ibesity rate for children may have fallen ● Question: what caused the lower relative price of food? ○ One reason can be technological improvements in agricultural production which increased the food supply and dropped the food prices ■ S (UP) → P (DOWN) Q (UP) ● Question: how elastic is the demand for food? ○ Generally speaking, food as basic necessities, the demand is inelastic ○ One study showed that the effects of a price drop for a calorie on consumption grows with time → demand is more elastic over time ○ In the short run, a 10% drop in price has only a modest effect, but if the price drop persists for 10 years, the effect will be twice ● Question: what should be the “full” relative prices of foods?

○ The food’s price tags (raw material costs) ○ Preparation costs (including the labor and time costs) ○ Weight-gain costs (including the long term health costs) ● Question: what other variables will affect the food supplies and consumption? ○ Examples: ■ Government farm policies such as subsidies of certain farm production such as wheat and corn ● S (UP) → P (DOWN) Q (UP) ■ Rich countries provided subsidies to poorest countries to purchase food ● D (UP) → P (UP) Q (UP ■ Sales taxes on food ● S (DOWN) → P (UP) Q (DOWN) ■ Regulations on food industry Obesity and Rising Food Prices ● Question: what will you expect if there is a relatively rapid rise in world prices of food? ○ Food consumption (DOWN) ○ Weight gain (DOWN) ○ The more durable the food price increases, the more likely that the higher food prices will moderate weight gain around the world The Real Price of Gasoline ● Question: will gas price affect weight gain? ○ A long-term decline in the real price of gas affects weight gain ○ As gas prices fall, people drive more and walk less ○ By the early 2000s, only 3% of Americans walked to work (down from 6% two decades earlier), while 87% drove to work and 5% took public transportation ○ When gas is cheap , people go out to dinner more frequently as they have more real income to spend on car travel and restaurants ○ Cheaper gasoline also means lower food distribution costs ○ People tend to consume more calories in out-of-home meals than from home- cooked meals because out-of-home meal portions tend to be larger and have more calories ● An economist figures that over five years, a $1 increase in the price of gasoline can lower Americans’ average weight by more than two pounds and the country’s obesity rate by close to 15% ● As the obesity rate declines, people’s health can improve and result in 120,000 lives saved each year and a $17 billion savings in annual health-care costs ● Many support an increase in gas taxes as a means of pushing up gas prices and pushing down the country’s excess-weight problems

● Question: the gasoline price is currently rising, what will be the effects on weight gain? ● Gas prices and people’s weight interact together, each affecting the other ● Economists have also found that people’s weight does put upward pressure on gas prices : the more weight people carry, the higher gas prices tend to be, and the more expensive food tends to be ● Why did large SUVs start becoming so popular in the 1980s? ○ Consider two forces at work, falling real gas prices and increasing waistlines ○ Higher gas and food prices together tend to abate people’s excessive weight that can, in turn, temper demand for large cars and gas Car Markets and Obesity ● Gasoline prices affect transportation costs , which indirectly affect weight gain ● The growth in the competitiveness of world automobile markets, with resulting quality and comfort improvements in cars that more than compensate for their higher sticker prices, can be expected to have some of the same effects on weight gain as a decrease in the real price of gas ● Lower import restrictions make world car markets more competitive ● International trade among all countries has risen dramatically ● The more economic freedom people have gained, the fatter we all have become. Chinese have long been noted for being relatively trim people, but they are getting fatter ● Global markets are more competitive and efficient , which have allowed people the luxury of eating more and gaining sometimes unwanted pounds Weight Problems: Product of Good Fortune ● Whatever the reason, when transportation costs are low , people tend to use more transportation rather than their own two feet, and consequently, they can gain weight ● As more people’s weight increases, so do the costs of healthcare and health insurance ● When real incomes increase and food prices fall , more (not all) people eat more and gain more weight ○ Real Income = Nominal Income/Price Level ○ When real income…..(NO PICTURE) Prices of Healthy Foods ● Question: healthy food vs unhealthy food? ● The rising of healthful foods (carrots and broccoli) compared with unhealthful foods (hamburgers and pastries) might also explain some of the increasing weight gain and obesity rate ● When the ratio of the price of healthful foods to unhealthful foods rose by close to 50%, people consumed more unhealthful foods and became more obese

● The relative full price of unhealthful foods could be falling substantially while their relative price tags are falling little to none. The time required to prepare unhealthy foods could be falling more than the time required to prepare healthful foods ● As real food prices dropped, consumers’ real income rose, contributing to the rising food consumption, especially unhealthy food Income Elasticity of Demand ● E i = Percent Change in QD/Percent Change in Income ● Normal goods - positive sign ● Inferior goods - negative sign Selected Income Elasticities of Demand Income Elasticity Income Elasticity Margarine -0.2 Automobiles 1.07 Telephone Services 0.32 Restaurant Meals 1.61 Clothing 0.51 Electricity 1.94 Furniture 0.53 Movies 3.41 Tobacco 0.86 Airline Travel 5.82 Growth in Out-of-Home Meals: U.S. ● In 2010, there were nearly twice as many fast-food restaurants in low-income/black neighborhoods than higher-income-white neighborhoods. By 2010, the typical American lived within a mile of at least one fast-food restaurant ● We have greater access to a wide variety of out-of-home cooked meals, and the choices are no longer just among burgers, fried chicken, and pizza ● → greater food consumption, especially of fatty and high-calorie foods with added sugar, salt, MSG and fat ● “All they have to do is pull out their cell phones and look up local restaurants on a smartphone app, and place a home-delivered order of virtually any food they can imagine” Fast-Food Economy: U.S. ● U.S. Department of Agriculture researchers have linked increased restaurant density to more than two thirds of the growth in people’s average BMI and obesity rate in the 1980s and 1990s

● Calories consumed per day from snacking nearly doubled from the late 1970s to the mid- 1990s ● Researchers reported that American adults consume an average of 4.4 meals a day, plus snacks ● Concluding claim: Americans’ weight gain in the 1980s and 1990s was because of increased portion sizes and/or more fattening meals bought at fast-food restaurants Fast-Food Economy ● Research in the U.S. also shows that the more dense fast-food restaurants are in communities (measured per capita or per mile), the greater the obesity rate – for young and old alike, but especially for low-income and black neighborhoods ● One Canadian study found that for every added fast-food restaurant per 10,000 residents across Canada’s major metropolitan areas, the community obesity rate goes up by 3% ● Among children , the calories consumed at fast-food restaurants during the same period increased fivefold ● Question: what type of market structure is the fast food industry in urban cities? ● Number of sellers: many ● Conditions of entry/exit: relatively easy ● Type of products/services: differentiated ● Control over price: some ● Non-price competition: considerable emphasis on advertising, brand names, trademarks ● → monopolistic competition Fast-Food Chains ● Many fast-food chains: oligopolistic competitive market ● The management control systems that McDonalds and other fast-food chains, as well as Walmart and Costco, have refined to improve the quality and efficiency of meal production can be partially blamed for people’s weight gain ● As large-scale food distributors have instituted management control efficiencies that have shown up in greater quality and variety of foods and those distributors have become ruthless negotiators for lower prices for their customers, they have reduced the relative full price of foods and increased consumption The Minimum Wage and Weight Gain ● Labor makes up as much as a third of fast-food restaurants’ total costs of operations , which means that the drop in the “real” minimum wage significantly lowered the real labor costs for many fast-food restaurants ● With cheaper real labor costs, fast food restaurants could slash the real price of their calorie-rich menu items (or increase the calories without a price increase), driving up the demand for fast foods encouraging a greater number of fast-food restaurants to spring up

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