Organic food labeling and pricing – Monopolistic competition and elasticity

The article examines a new trend of food consumption in the U.S. As people become more conscious of their diets, a new market has been created with foods that are labeled organic according to the USDA’s standards. There are a couple of economic concepts seen in this growing market.

  1. Monopolistic competition: The first producer who utilized the desire for organic foods and put a label on organic foods to separate it from other foods in the market successfully started this new market They probably had monopoly power for a short amount of time at first. But now it has turned into monopolistic competition because since the cost of entry is low, more and more sellers come into the market. The foods sold by each producer are still slightly different from each other, giving the firms the monopolistic characteristic even though there are many firms in the market. Each firm faces a downward demand curve, but all firm’s demand curve are currently shifting to the left because many other firms are constantly entering the market of organic foods. This is a fairly new market and the demand curves and prices are still shifting, while nothing is settled yet, this seems to be the current general trend.
  2. Inelasticity of demand: The sellers are still selling at a price above marginal cost and they can cut down production and raise the prices because there is an inelastic demand for organic products. The author stated that people are willing to pay up to 100 percent more for organic produce. High prices and small quantity supplied can be seen easily in stores. The price of organic foods are often higher than normal foods but it is also valued more, and organic foods are more difficult to find whereas normal grocery are found easily in neighborhoods.

Article: http://www.investopedia.com/articles/investing/021215/economics-organic-labeling.asp

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