9/28/2007

Inelasticity of Potatoes

After I reviewed the research conducted by the United States Potato Board, I was surprised by the results. However, after review of the research, I agree with the Board that potatoes can be fairly inelastic. The consumption of potatoes in the United States is very high and substitutes for potatoes may be easy to find, but substitutes like instant potatoes are not good.

Since many consumers of potatoes think they pay more for potatoes than they actually pay, the increase in price of potatoes would not significantly decrease the demand for potatoes to a certain point. According to the research, prices could increase by a significant amount with little decline in demand. Yet, I am not sure if I agree with the article on significant changes in price. Although potatoes may be fairly inelastic with small increases in potato prices, I also believe that if the price is increased significantly that demand will become very elastic. I can also see how significant price changes in potatoes would not decrease demand since most consumers are willing to pay more for potatoes without a decrease in demand. Are potatoes really as inelastic as the article claims? I think that the article is very convincing, but I am not completely convinced.

9 comments:

Dr. Tufte said...

Actually, most produce staples have inelastic demand.

This is why orange growers actually don't get hurt that often by freezes (the news coverage notwithstanding).

Sophie said...

This is an interesting article, because I would not have thought of potatoes as being an inelastic good. It seems like there would be a great deal of substitutes that would be available for potatoes, but I guess that that is not how most consumers see it. I wonder how high the price of potatoes could be raised before people would not purchase these goods any more?

Matthew said...

When I first read this post that potatoes had few substitutes, I thought it was ridiculous. I love instant potatoes! They come with great butter flavor, and best of all, only take seconds to make, as opposed to washing, peeling, cutting, and cooking real potatoes. After thinking about it though, I realized that instant potato flakes are a substitute for mashed potatoes only. Besides yams, (which really are not a substitute – gross!) it's much harder to have a substitute for fried, boiled, and baked potatoes. I had never realized that most produce staples were inelastic.

Dr. Tufte said...

Most of them aren't.

But, elasticity depends on the broadness of the definition used for the product. And, in the case of potatoes, the different methods of preparation make for a very board definition.

We'd no doubt find that "starchy things we serve with entrees" is even more inelastic: a steak and candy bar entree is just not very substitutable for a steak and baked potato entree.

Matthew said...

When I first read this post that potatoes had few substitutes, I thought it was ridiculous. I love instant potatoes! They come with great butter flavor, and best of all, only take seconds to make, as opposed to washing, peeling, cutting, and cooking real potatoes. After thinking about it though, I realized that instant potato flakes are a substitute for mashed potatoes only. Besides yams, (which really are not a substitute – gross!) it's much harder to have a substitute for fried, boiled, and baked potatoes. I had never realized that most produce staples were inelastic.

Jordan said...

Dr. Tufte said:

"But, elasticity depends on the broadness of the definition used for the product. And, in the case of potatoes, the different methods of preparation make for a very board definition. We'd no doubt find that "starchy things we serve with entrees" is even more inelastic: a steak and candy bar entree is just not very substitutable for a steak and baked potato entree."

Given a long period of time, could we eventually find a satisfactory substitute for potatoes if prices were to skyrocket? It seems like tastes would start to change if people had to start paying a heavy price for a side of potatoes.

William said...

Dr. Tufte,
I find it interesting to think that most staples are inelastic. I guess this is dependent on the majority. Because if any fruit raises a significant amount I will not buy it, I guess this due to being on a college budget though. Maybe if I had a family and a bigger budget I wouldn't mind an increase.

Trinity said...

Dr. Tufte makes a good point but I think it would be prudent to remember who did this study. Of course potato people would be in favor of raising price so they could make more money. But it's very true that a candy bar or gummy worms will hardly take the place of a potato next to a steak.

Dr. Tufte said...

You also need to remember that goods become more elastic over time, but we don't specify how much time. Perhaps with potatoes it's a season or so.