Is price elasticity of demand for bread truly inelastic?

by Morton Sosland
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As prices for wheat, for flour and for bread have soared as a result of this year’s amazing market strength, a great deal of thought has focused on how demand is being affected by prices rising to history-making levels. Is it possible that just as much wheat will be ground into flour for bread at $8 and $10 per bushel as was used when the cost was less than half those astounding figures? Aggregate use forecasts, for the United States and other developed nations, as well as for many of the developing countries, would indicate that demand has hardly been affected by this startling climb. Of course, individual cases may be cited where a country, mainly in Africa, has shut off imports because of foreign exchange shortages to buy wheat at these prices. Also, use in feeding has come almost to a halt in the wake of wheat prices considerably higher than being paid for corn and other feed ingredients. Yet, with these exceptions considered, it appears that consumption rates for wheat and bread confirm their classic positions as products whose demand is hardly moved by even large price changes.

Economists have studied for years the so-called "own-price elasticity of demand" for products like wheat, flour and bread. "Own-price" means measuring how the price for wheat itself affects the level of demand for wheat. The U.S. Department of Agriculture has done studies of major food groups, including bread and cereals, and it has compiled these measures not just for America, but for most of the other countries of the world. The original goal was to determine how changes in international prices might affect demand for U.S. wheat in export trade. The possibilities of prices soaring into the stratosphere played hardly a role in these calculations.

For grain-based foods, it should be no surprise that these studies affirm that consumption of bread and cereals changes very little in response to their own price movements. A 1 per cent change, up or down, in prices would result in the opposite change in use of bread and cereals at 0.04 per cent. The latest consumer price compilations show white pan bread prices up 13 per cent from a year ago, which, based on the official estimate of price elasticity of demand for bread, would point to a reduction of 0.52 per cent in demand. Such a change is hardly measurable in the context of the U.S. domestic market for bread, helping to explain why the price upturns are almost invisible.

It is no surprise that the price elasticity of demand for bread is lower in the United States than in most other countries. Yet, even in the developing nations of Africa, countries like Benin, Nigeria and Tanzania, the calculation is less than 0.5 per cent. This means that a 10 per cent price advance in these countries would prompt a 5 per cent fall in demand. From an economist’s point of view, the low price elasticity of demand for bread reflects not just the basic importance of this food to the well-being of people around the world, but also indicates that in most nations, bread has attained a status where it has relatively little competition in the diet. Bread made from lower-priced corn has historically replaced wheat only in those situations where a government has dictated this change.

Not only may grain-based foods derive a degree of comfort from the low price elasticity of bread, but the measure of 0.04 for cereals and bread is the lowest of any of the food categories. Indeed, bread is only half of the 0.082 price elasticity of demand for the entire food, beverage and tobacco group. Yet, unprecedented wheat price moves, like those occurring this crop year, may weaken the basis for estimating that low price elasticity. This is particularly so when the climb in wheat outshone other grains and commodities in a way that is without precedent.

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By nkoko 5/4/2016 3:53:43 AM
elasticity to explain why a fall in the price of bread will not necessarily lead to increase in the demand of bread by some section of the population in the country.