Why Olive Oil, Good for the Body, is Becoming Hard on the Pocket Book

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This post uses supply and demand curves to interpret events in the olive oil market. It was updated Nov 14, 2014. Follow this link to view the updated version:

http://www.slideshare.net/dolaneconslide/why-is-olive-oil-good-for-the-body-so-hard-on-the-budget

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Why Olive Oil, Good for the Body, is Becoming Hard on the Pocket Book

  1. Economics for your Classroom from Ed Dolan’s Econ Blog Why is Olive Oil, Good for the Body, Getting Hard on the Pocket Book? Feb. 4, 2013 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing. This slideshow was updated Nov. 14, 2014. Follow this link to view the revised version
  2. Olive Oil is Good!  Olive oil is delicious!  Its high content of monsaturated fat makes it among the most healthy of cooking oils  It has zillions of other uses, too . .  Great for your skin  Olive-oil-infused jeans  Try it for shaving! Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Picture source: Alex Ex via http://commons.wikimedia.org/wiki/File:Italian_olive_oil_2007.jpg
  3. But Olive Oil Prices are Soaring. Why? Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/  Unfortunately for consumers, the price of olive oil is soaring  This chart shows futures prices for the 2012/13 harvest season
  4. Changes in Consumer Behavior  No meal in Southern Europe is complete without a basket of bread and a dish of olive oil  However, the economy is bad in Europe. Consumers there are cutting back even on staples like olive oil  Meanwhile, people around the world are starting to recognize the pleasure and heath benefits of the Mediterranean diet. Olive oil is becoming more popular with consumers in the U.S., China, Brazil, Russia, and elsewhere Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Bread and Olive Oil Photo by Ewan Munro http://commons.wikimedia.org/wiki/File:Murano,_Mayfair,_London _%285210809193%29.jpg
  5. Question: How Do Changes in Consumer Behavior Affect Price? How do changes in consumer incomes and tastes affect the price of olive oil? Consider each factor separately, and then together  Does the demand curve shift? If so, show the new demand curve  Does the supply curve shift? If so, show the new supply curve  Show the new equilibrium price Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  6. Answer: How Changes in Consumer Behavior Affect Price  Olive oil is a normal good so fall in European consumer incomes by themselves would shift demand toward D1  Meanwhile increasing preference for olive oil in the rest of the world would have the opposite effect, shifting demand back toward D0  In practice, the two effects are expected to roughly cancel each other out during 2013, leaving demand little changed  The changes in consumer behavior do not affect the “other things being equal” conditions behind the supply curve, so they do not shift the supply curve Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  7. Bad Weather in Spain, the Biggest Producer  Spain is by far the largest producer of olive oil  The weather has been bad  Frost in spring of 2012  Drought in summer of 2012  The winter harvest was down by more than half  No other producer is large enough to make up the lost Spanish production Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  8. Question: How Does the Bad Weather Affect the Price? Other things being equal, how does bad weather affect the price?  Does the demand curve shift? If so, show the new demand curve as D2  Does the supply curve shift? If so, show the new supply curve as S2  Show the new equilibrium price as P2 Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  9. Answer: How Bad Weather Affects the Price  Bad weather will cause the supply curve to shift to the left, for example, from S0 to S2as shown here.  Other things being equal, the weather will not affect the demand curve  The market moves long the demand curve until a new equilibrium price is reached at the level P2 Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/
  10. The Bottom Line Feb 5, 2013 Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/  Demand will not be a big factor affecting olive oil prices for 2013, although world demand can be expected to grow in the future  In the short run, there is no way other countries can make up for the supply lost from bad weather in Spain  In the long run, new production in Tunisia, California, and elsewhere will help keep olive oil affordable around the world
  11. Click here to learn more about Ed Dolan’s Econ texts or visit www.bvtpublishing.com For more slideshows and commentary, follow Ed Dolan’s Econ Blog Like this slideshow? Share it on Twitter Follow @DolanEcon on Twitter

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