Gasoline prices and how they affect many markets. Nice practice!

Here is a terrific article from the WSJ (I think it is ungated) that illustrates a bunch of introductory microeconomic concepts within the Supply and Demand unit.

This paragraph speaks mostly to the Demand-side:

“Households had the potential to save $630 at the pump, of which they spent the majority—58%. This spending provided more than a $200 boost to spending on non-gas goods and services, primarily restaurants and retailers. The lower gas prices also caused significant changes in household transportation choices, leading people to spend $150 more at gas stations and spend less on transit.”---WSJ Real Time Economics

Substitutes, Complements, movement along and a shifting of various Demand curve(s).

Happy graph drawing!

Discrimination is alive and well against fruits and veggies in the EU.

The European Union (EU) has strict standards (see HERE) when it comes to the sale of certain fruits and vegetables.

In order to be sold in markets they must meet not only quality specifications but "appearance" standards as well.  This results in LOTS of food waste because the "Ugly Fruit and Veggies" never make it to the selves.

This article is about a woman in Portugal who is taking on the problem of "Lookism" in produce section.

Portuguese Food Co-op Fights Back Against EU-Mandated Waste

Baylen Linnekin speaks with Maria Canelhas from Fruta Feia, which has saved literally tons of great food from the garbage.

Seems like this is a way to keep prices high as well.  There is plenty of ugly produce that is perfectly edible and meets all the standards for consumption.

Ugly Produce is a suitable substitute for "Beautiful Produce".  A face palm to the concept of Substitution Bias.

Guess this guy below would not be welcome at a super marche' in Paris.  Looks like he could whoop up on the other veggies in the bins.

I have had this for awhile. I lost track of the source

NOTE: I corrected several spelling errors. Note to self: Press.Spell.Check.  :)

Substitute versus Substitution Effect. Only one word difference but the difference is BIG.

One of the more difficult things to teach to students is the difference between a Substitute (good or service) and the Substitution Effect that the Substitute good or service has on demand for the good that is subject to substitution.  Got that?  

Here is a terrific article on the rise in beef prices and its impact on the market for chicken.  Below I created some slides that hopefully will make the distinction between the two key micro-economic concepts more clear.  Use as you like!  Let me know if you see any errors or how I can refine any aspect.  Thanks.

Beef prices hit wallets, boost poultry's appeal (HT: Big Picture Agriculture)

There's no beef about it, prices for red meat are surging and demand for chicken is benefiting. 

Chicken's versatile appeal and its perception as a good source of protein that's better for you than red meat are also driving sales, RBC Capital Markets' David Palmer said in a phone interview. 

"Chicken is really hot right now, and poultry is viewed as a source of protein that's relatively less inflationary," Palmer said.

"Eat Mor Chicken" is the market response to "Where's the Beef?"---Nice graphic showing what is happening in the meat market...

A nice teaching moment courtesy of The Wall Street Journal. The graphic below illustrates how the increase in the price of beef at the wholesale level is increasing the price at the retail level AND  it is affecting the demand for a related good---Chicken.  Makes illustrating the concept of Substitutes pretty easy.

In economics, goods are substitutes if a DIRECT relationship exists between the change in Quantity Demanded of one good and the change in price of a second good.

If Price of Good 1 increases and the Quantity Demanded for Good 2 increases, and vice versa, if the Price of Good 2 decreases and the Quantity Demanded for Good 2 decreases then the goods are Substitutes.

You can see as the price of beef increases the demand for Chicken and Pork increases as well.  Now, there could be other reasons the demand for chicken/pork has increased other than the price of beef.

There is your homework.  Get to work! :)

Source: Wall Street Journal

Nice article illustrating Opportunity Costs, the PPF and Supply and Demand in Agricultural Markets...

Farmers’ corn push to hit soyabeans (The Financial Times)

Food commodity prices rose after US farmers signalled plans to sow the most corn in 75 years, taking away land from soyabeans, which are facing a fall in supplies due to droughts in South America.
A US government survey of 84,500 farm operators indicated they would plant 95.9m acres (38.4m hectares) with corn this spring, 4 per cent more than last year, the most since 1937 and above expectations. Plantings of soyabeans, often rotated with corn, would fall 1 per cent from last year to 73.9m acres (29.6m hectares), with declines in such fertile states as Iowa, Missouri and Nebraska.

The US is the world’s leading exporter of corn and vies with Brazil in soyabean exports, so decisions made there are vital to global food markets. A growing world population and rising incomes in emerging economies have driven greater appetites for the crops, used in products from pig feed to vegetable oil.

Oilseed traders are increasingly on edge after a severe drought hurt the current soyabean crop in South America. The US Department of Agriculture’s annual Prospective Plantings report sent related canola and rapeseed futures markets higher in Canada and Europe. China buys three of every five bushels of the world’s soyabean imports.

“This is the annus horribilis for South American grain production. La Niña hit all the wrong places. For soyabeans, it makes the US all the more important,” said Nick Higgins, commodity analyst at Rabobank, the Dutch bank that is one of the biggest lenders to the agribusiness industry.

The US also said stocks of domestic corn left over from last year’s harvest totalled 6bn bushels on March 1, down 8 per cent from a year ago. The number was slightly lower than anticipated and suggested very low inventories before this year’s harvest begins.

CBOT May corn, which reflects the old crop, rose 6.6 per cent to $6.44 a bushel in Chicago. December corn gained just 3.1 per cent.

CBOT May soyabeans added 3.5 per cent to reach $14.03 a bushel, while soyabeans for November delivery rose 4.1 per cent. ICE May canola rose 3.2 per cent to C$622.50 a tonne in Winnipeg, touching the highest price since the global food crisis of 2007-08.

Corn peaked at a record of almost $8 a bushel last June as growers sought to meet demand from livestock producers and the US ethanol industry. If farmers follow through with planting intentions and yields are good, this year’s crop could break records, helping ease concerns about food prices.
The USDA also said that farmers intended to plant 13.2m acres of cotton, 11 per cent below last year.
Wheat acres are growing 3 per cent from a year ago to 55.9m acres.

Which vehicles are in the shortest supply right now? With $4.00+ gasoline, that is too easy a question...

Many pundits in the economics  blogosphere have pegged $4.00 a gallon as the breaking point for people to seriously start changing their level of gasoline consumption.  It seems as though it has begun in the car market.  Fuel efficient vehicles are in short supply because of increased demand. Below are the cars that are in the shortest supply.  Next to the name of the vehicle is the "time to turn" or the number of days on average the car sits on the lot before it is sold.  In many cases the cars are sold before hitting the lots. The first number is from April of this year. The second number is what the churn time was last April. What a difference a year makes...

BMW X5 16 ,39

Ford Explorer 19, 48

Hyundai Elantra 12, 79

Toyota Prius 20, 36

Porsche Cayenne 18, 91

BMW X3 14, 32

Audi Q7 14, 18

Chevy Equinox 19 14

Audi Q5 16, 16

Chevrolet Volt 18, N/A

GMC Terrain 19, 14

Fiat 500 11, N/A

Nissan Leaf 5, N/A

Lexus CT 200h 11, N/A

Mini Countryman 16, N/A

       ""Which new cars and trucks are most in demand?

One good measure is to see how fast they are flying off sales lots into the hands of buyers. In the auto industry, it's known as "days to turn." Interesting, though, when you look at the Edmunds.com list for April. You'd think the list would be dominated by Japanese models whose production was stopped or reduced because of the March earthquake. And, sure, some are on the list. But it's actually a pretty mixed bag.

If there anything in common, it is that gas savers prevail. A year ago, more SUVs were in short supply.

As for the vehicle in shortest supply, Edmunds.com says it's Nissan's all-electric Leaf. Since all were preordered, all are claimed as soon as they land. The days-to-turn was only five days. Next is Lexus' sharp CT 200h, a small Prius-like hybrid that just went on sale as the Japanese earthquake hit, causing huge production problems and limited supply for the car. It had only an 11-day wait. So, too, did Chrysler Group's new Fiat 500.

Hyundai's new 40-miles-per-gallon (on the highway, anyway) compact Elantra is down to only a 12-day supply, compared with a 79-day supply for the version it replaced last year. BMW's small, hot X3 and Audi's big Q7 crossover SUV tie at 14 days.

While the list includes models that would have been affected by the shortages arising from the earthquake, they don't necessarily dominate the list."" (USA TODAY)

Is gasoline a substitute or a complement for motorized scooters? Whatever the relationship the demand for them is going through the roof!!

The recent spike in gas prices is benefiting the bicycle and motor-ized scooter industries: 

Bike, scooter sales pick up speed

""Sales of new bikes rose 9% in the first quarter of this year, compared with the same period in 2010, and sales of road bikes — commonly used in commuting — jumped 29%, says Scott Jaeger, senior retail analyst with Leisure Trends Group, a Boulder, Colo.-based retail tracking firm. Sales of gas-powered scooters are up even more: nearly 50% in the first quarter compared with a year ago, says the Motorcycle Industry Council, a trade group. "We see spikes when fuel prices rise," says Ty van Hooydonk, the group's spokesman, noting many scooters average 60 to 80 miles per gallon.  When gas prices last peaked in the summer of 2008, Census data show bike commuting rose 15% nationwide from 2007.""

 Normally we think of gasoline as a complementary good, one that is used with another good such as cars. In this case, as cited in the article gasoline, bicycles and scooters are substitute goods. In economics we define goods as substitutes if the increase in the price of one good increases the demand for another good OR the decrease in the price of one good decreases demand for another good.  The relationship between price and quantity demanded is DIRECT in the case of substitute goods.


The increase in gas prices is increasing the demand for bicycles and gas powered scooters. It is very easy to see that a bicycle is a substitute for gasoline because they are not used together. But it is more difficult to see how a motorized scooter, which uses gasoline is a substitute for, well, gasoline.

I think the easiest way to understand this is to establish the "strength of the connection" between the two goods. Although I use gas in my scooter I am trying to GET AWAY from the high price of gasoline by substituting to a good that will allow me to consume as little gasoline as possible. If gas prices decreased and the demand for, say,  gas-guzzling SUV's increased, then consumers are RUNNING TOWARDS  more gasoline consumption---gasoline and SUV's are Complementary goods--the decrease in the price of gasoline increases the demand for SUV's.  Complements have an INVERSE relationship between price and demand.   

We can extend this to hybrid and other fuel efficient vehicles.  Gas prices increase and the  demand for these categories of cars increases. This meets the definition of Substitute goods.  Gas prices increase and the demand for SUV's deceases. This meets the definition for the goods to be Complements. 

On the AP Microeconomics test, they usually don't divide the line this thin. However, it will be in your interest to deepen your understanding of the differences between Substitutes and Complements.