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Ed Dolan’s Econ Blog Why is Olive Oil, Good for the Body, So Hard on the Budget? Updated Nov. 14, 2014 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.

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! Picture source: Alex Ex via http://commons.wikimedia.org/wiki/File:Italian_olive_oil_2007.jpg Nov. 14, 2014 Ed Dolan’s Econ Blog

But Olive Oil Prices are
Soaring. Why?  The price of olive oil jumped in 2012 and has stayed through 2013 and 2014, although it is still below the all-time high reached in 1996  This chart shows prices over the past five years, using a 12-month moving average to smooth seasonal fluctuations  What has happened? Nov. 14, 2014 Ed Dolan’s Econ Blog

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 Bread and Olive Oil Photo by Ewan Munro http://commons.wikimedia.org/wiki/File:Murano,_Mayfair,_London _%285210809193%29.jpg Nov. 14, 2014 Ed Dolan’s Econ Blog

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 Nov. 14, 2014 Ed Dolan’s Econ Blog

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 roughly canceled each other out during 2013 and 2014, 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 Nov. 14, 2014 Ed Dolan’s Econ Blog

War and Bad Weather in
Producing Countries  Spain is by far the largest producer of olive oil  The weather in Spain has been bad—first frost, then persistent drought  Civil war has devastated production in Syria, normally the fourth-largest producer  Output is up a bit in Greece but other producers are simply not large enough to make up the lost Spanish and Syrian production Nov. 14, 2014 Ed Dolan’s Econ Blog

Question: How Do War and
Bad Weather Affect the Price? Other things being equal, how do war and 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 Nov. 14, 2014 Ed Dolan’s Econ Blog

Answer: How War and Bad
Weather Affect the Price  Bad weather and war both cause the supply curve to shift to the left, for example, from S0 to S2as shown here.  Other things being equal, weather will have little effect on the demand curve  The war in Syria would cause demand in that country to shift to the left, but the effect on demand in the world market would hardly be noticeable  The market moves long the demand curve until a new equilibrium price is reached at the level P2 Nov. 14, 2014 Ed Dolan’s Econ Blog

The Bottom Line  Demand
will not be a big factor affecting olive oil prices in the short run, although world demand can be expected to grow in the future, especially if European economies recover  In the short run, it will be hard to replace supply lost in Spain and Syria  In the long run, new production in Tunisia, California, and elsewhere will, hopefully, keep olive oil affordable around the world Nov. 14, 2014 Ed Dolan’s Econ Blog

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