Photo: dutchboyThe Economist reports that pork prices have plunged 24 percent in the past year, partly because the demand for U.S. pork exports has dropped sharply. I don’t eat pork, so how does this help me?
With a lower price of pork, the quantity demanded will rise, as people shift into this now-cheaper meat. And that will shift the demand curve leftward in related markets, including pork substitutes, such as beef and perhaps even chicken. Since I eat those, I will benefit indirectly from the drop in pork prices.
Furthermore, the drop in pork prices may be a long-run phenomenon, since one reason for it is a set of technological improvements in pig-raising. With lower long-run average costs, prices will remain lower than they were last year for quite a while. That means that my benefits will continue even without any efficiency gains among beef and chicken producers. (Related: sugar prices are way up.)
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I am skeptical regarding your premise that people will change their behavior to eat more pork because it’s cheaper. That assumes (1) price elasticity of current pork consumers, and (2) pork as a beef or other meat substitute. Regarding (1), pork is already cheaper than beef, so the price buyers are already feeding at the trough. Will these same people tend to spend the same amount of money and eat more pork, or will they spend their savings in some other manner? In this economy, I’d be surprised if they went for a few more strips of bacon, rather than spend their price windfall on other things. As for (2), I am similarly skeptical that non-pork eaters will suddenly find pork attractive because it’s now even cheaper than before. Instead a $5 hamburger, would they really go for a $3 pork burger? That does not sit right in my stomach…
What about the effects of price on supply? In the long term, a sustained low in the price of pork will drive producers out of the market.
Not necessarily. A shift in demand may have caused the quantity demanded to decline, which led to the decline in price. Sort of like how automobile prices have declined and the industry is struggling, although car prices are lower.
The low price could mean people prefer to consume other types of foods and less pork. Ceteris paribus rarely holds in the real world.
You also fail to consider that some of the drop in demand is likely caused by consumers switching from pork to other meats out of fear of swine flu. Thus there will be increased demand (and price) of non-swine based substitutes.
Anecdotal of course, but as a financially-constrained college student I usually choose which meat to buy based on what’s on sale — pork has often been marked down at my local grocery store recently, hence I’ve been buying more of it, which means less beef and chicken, exactly as Dan describes.
Richard B.,
Even if many consumers don’t switch, some will. For example, as pork prices go down restaurants are more likely to make a pork chop the daily special and institutional food services (school cafeterias, prisons, etc.) are more likely to serve pork rather than beef. And while most of us are unlikely to choose a pork burger over a beef burger, if the package of pork sausage is $2.99 and the beef or chicken sausage is $3.99, many consumers might think of the two as basically interchangeable and go for the cheaper one. The same applies to cold cuts (ham vs. roast beef).
As long as there’s *some* substitution in the market, prices for one good will affect those of the other; it’s not necessary that ALL uses of the product be interchangeable. When I go to buy fruit I choose whatever seems fresh and reasonably priced, so I might get peaches one week and cherries the next. For my snacking needs these fruits are generally interchangeable. But if I plan to bake an apple pie I need apples; only at the extremes (if all the apples are $10/lb and rotting) will I substitute. If you insist on eating blueberries every week, I’m helping keep your blueberry price low by not competing with you for them unless they are particularly cheap (or I feel like making muffins).
Is this of any use to us vegetarians?
Agree with Fowles! you skipped the part that will make you worse off…
You cannot associate the drop in demand to a future rise in demand…pretending the substitues only react to the second shift!