Microeconomics: IB Economics

The latest Kantar data suggests that consumer tastes are changing, with consumers opting in favour of frozen food ahead of fresh produce. It's a simple application of both income and cross price elasticity of demand.

Evidence of two things: changing consumer tastes and the effect of YED on consumption patterns. It seems as though people are switching from fresh food to frozen food, both to cut their bills, and also the amount of food waste that they produce, according to the boss of Tesco.  

If you're familiar with the concept of income elasticity of demand this shouldn't surprise you - and I hope you'd be able to explain why. 

The longer-term question is whether the discounters will be able to keep these customers longer term. 

The first article of the weekend gives you lots to get your teeth into: competition in the supermarket sector, monopsony power costs, income elasticity of demand and more.

In the first place, the retail environment has changed post-Covid 19: if we're in a deep recession, and incomes have fallen, then it's likely that shoppers will continue to switch to discounters, like Aldi and Lidl, and Tesco have tried to pre-empt this, by putting pressure on suppliers to cut costs. In a recession, retailers of inferior goods are likely to perform better than those selling normal goods - hence expect Aldi and Lidi to out-perform Waitrose in the next 12 months.

Of course, Tesco may also be banking on the fact that the suppliers themselves face tough trading conditions, and rather than risk not having retail customers, they agree to price cuts. Of course, this is blatant exploitation of a monopsony position. A supermarket who has done rather well out of the pandemic, has reserves of cash, and can borrow at lower interest rates than their smaller suppliers, and the are prepared to take the risk that some of their suppliers will look elsewhere.

And then there's the whole issue of costs - in this case, lowering variable costs - the nature of the pandemic has altered Tesco's cost structure, with more spending on online retail - presumably more delivery vans have been bought and so on. Many of these are fixed costs; to compensate, the supermarket is likely to want to reduce variable costs to keep prices low. 

I could go on - one wonders if the Grocer Code Adjudicator has an interest in this.... 

Competition in the supermarket sector, and a little bit of YED too - both unsurprising, given the state of the economy, with a high-end grocery retailer looking to price match with a mid-range supermarket. 

It's fascinating, given that these supermarkets have themselves sought to price-match discounters, and reflects the fact that demand for luxury goods will be falling more rapidly that necessities or inferior goods. 

On the one hand, you might be forgiven for thinking that this is surprising given the cost of living crisis. On the other you might think about the type of good that an EasyJet holiday might be relative to other holidays.

If you think about the latter, you might think about income elasticity, and if you think EasyJet holidays are an inferior good and that incomes are falling then this article contains no surprises. 

Changing consumer tastes, income elasticity of demand, it's all here - with the news that the pandemic has seen a rise in camping, with 20% of adults having been on a camping or caravan holiday since the start of lockdown.

This mirrors what happened after the global financial crisis, suggesting that camping might be an inferior good - i.e. the quantity of camping demanded rises when incomes fall. 

More excellence from Marginal Revolution University: inferior goods. What are? And do they actually exist? There's little evidence for them.