Wednesday, February 9, 2011

"Nobody Doesn't Like Sara Lee"---Does this mean Demand for Sara Lee products is INELASTIC?

This excerpt from today's Wall Street Journal on Sara Lee's performance in the last quarter:
""In the company's North American retail business, revenue grew 1% in the latest quarter on higher prices but weaker volume, and profit was down 28% on sharply weaker margins."
The numbers suggest, at least for the last quarter, that the demand for Sara Lee products is relatively INELASTIC. Even though they increased prices ("higher prices") to customers and quantity demanded decreased (assuming this is what they mean by "volume") total revenues INCREASED ("1%"). This happens if the the percentage increase in price is greater than the percentage decrease in quantity demanded. The formula for Elasticity of Demand is % change in Quantity Demanded divided by the % change in Price.  If it yields a number LESS THAN 1, then Demand is said to be relatively INELASTIC. 

However, they should not expect this continue.  The availability of subsitutes will tend to, overtime, make the demand for their products more elastic as people make alternative choices based on relative prices for the subsitutes:

""Sales volume fell and the company lost share in some categories to lower-priced options, such as store-brand products.""
Competition helps keep prices as low as possible, even in the face of rising input prices.  Sara Lee and other food producers have to balance their costs of producing with what consumers are willing and able to pay.  When allowed to function PROPERLY the "invisible hand" can work very well. 
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