ECO 365 Week 2 Elasticity Example

How Much Do Shoppers Cut Back When Eggs Double in Price? Measuring Price Elasticity of Demand and Supply in the Egg Market and What It Meant for Revenue and Tax Burdens

[Student Name]

University of Phoenix

ECO/365: Principles of Microeconomics

Week 2 Assignment

[Instructor Name]

[Date]

The bakery and grocery figures are composites written for a model paper; elasticity estimates and research findings come from the sources listed and are stated generally.

Week 1 explained why egg prices rose in early 2025: avian influenza shifted supply sharply left while buyers kept purchasing. A composite regional grocery chain in Ohio, which supplies Maria Ortiz's bakery, tracked its egg sales through the spike. Its managers asked how much shoppers cut back and whether the chain should have priced differently. Knowing that quantity falls when price rises is the start of economics; knowing by how much is what businesses and governments actually need. This paper measures it.

What Elasticity Measures

Price elasticity of demand measures how strongly the quantity demanded responds to a change in price: computed by dividing the percent change in quantity by the percent change in price. Demand is elastic when quantity changes by a larger percentage than price, inelastic when it changes by a smaller percentage and unit elastic when they change equally (Mankiw, 2021). Elasticity differs from slope because it uses percentages, so it does not depend on whether quantity is measured in dozens or cases.

Computing It From the Chain's Data

In the spring of 2024, the chain sold about 410,000 dozen eggs a month at an average price of $2.89. In February 2025, it sold about 365,000 dozen at an average price of $5.79. Using the midpoint method, the percentage change in quantity is the change of 45,000 dozen divided by the average quantity of 387,500, about negative 11.6 percent. The percentage change in price is the change of $2.90 divided by the average price of $4.34, about 66.8 percent. The price elasticity of demand is about 0.17 in absolute value, highly inelastic.

Comparing With Published Estimates

Andreyeva et al. (2010) reviewed studies of food price elasticities in the United States and reported that eggs were among the least price-responsive foods, with a mean elasticity of about 0.27. The chain's estimate is somewhat lower, as expected in a short period when shoppers had little time to adjust and when other stores raised prices at the same time, leaving no cheaper source.

Why Eggs Are Inelastic

The determinants of elasticity explain the result. Few products can stand in for eggs, especially in baking. They take a small share of most household budgets, so even a doubled price did not force large cuts. Many shoppers see eggs as a staple. And in the short run, households had little time to change habits. Over a longer period, demand becomes more elastic as people learn new recipes and substitutes.

The Total Revenue Test

With inelastic demand, a higher price lifts total spending, since the drop in purchases is proportionally smaller than the price increase. The chain's egg revenue rose from about $1.18 million a month to about $2.11 million, an increase of nearly 80 percent, even though it sold 11 percent fewer dozens. Consumers spent more on eggs, not less, during the spike. Had demand been elastic, revenue would have fallen.

The Elasticity of Supply

Price elasticity of supply measures how quantity supplied responds to price. In the short run, egg supply is nearly fixed by the number of laying hens, and replacing hens takes months, so supply was very inelastic. Over a year, as producers restocked and expanded, supply became more elastic. That difference between short-run and long-run supply explains why prices spiked quickly and fell back more slowly as flocks were rebuilt.

Income Elasticity

Income elasticity measures how demand responds to income. Eggs are a normal good with a low income elasticity: as incomes rise, people buy slightly more, but spending on eggs grows more slowly than income. That is typical of basic foods and helps explain why demand did not fall much in a period of steady employment.

Cross-Price Elasticity

Cross-price elasticity captures how buying of one good reacts when another good's price moves. Substitutes have positive cross-price elasticities: as egg prices rose, the chain's sales of liquid egg substitutes and plant-based egg products rose about 18 percent. Complements have negative ones: sales of bacon fell slightly as fewer shoppers made egg breakfasts. Maria's bakery found that flax mixtures substituted well in breads but not in custards, where eggs have no real substitute.

Who Bears a Tax

Elasticity also determines who bears a tax. If a state imposed a tax of 50 cents per dozen on eggs, the burden would be shared between buyers and sellers according to their responsiveness. With very inelastic demand and more elastic long-run supply, most of the tax would be passed to consumers as higher prices. Policymakers who want to tax a good without much change in consumption choose goods with inelastic demand, which is one reason such taxes fall heavily on consumers. Mullally and Lusk (2018) found a similar pattern when California's hen housing rules raised production costs: egg prices rose and consumers absorbed much of the added cost.

Elasticity Over Time

The chain's managers tracked weekly sales through spring and found that the elasticity grew as weeks passed. In the first month of high prices, quantity barely moved; by the third month, shoppers had found recipes using fewer eggs and had shifted some purchases to liquid substitutes, so a given price produced a larger drop in quantity. Long-run demand is more elastic than short-run demand because people need time to change habits, find substitutes and use up what they stocked. The pattern explains why the chain expected egg sales to recover only gradually even as prices fell.

Pricing Lessons for the Chain

The chain's managers wondered whether they should have raised prices further. Inelastic demand means higher prices would have raised revenue in the short run, but the chain also weighed fairness and long-run customer loyalty, since shoppers remember feeling gouged. It chose to raise egg prices roughly in line with wholesale costs and to promote substitutes, accepting lower margins on eggs to protect traffic for everything else in the store.

Conclusion

The chain's data put the price elasticity of demand for eggs near 0.17 during the spike, very inelastic and consistent with published estimates. Inelastic demand explains why spending on eggs rose as prices doubled, why prices had to rise so far to ration a smaller supply and why most of any tax on eggs would fall on consumers. Elasticity turns the direction of change from Week 1 into a measure businesses can use.

References

Andreyeva, T., Long, M. W., & Brownell, K. D. (2010). The impact of food prices on consumption: A systematic review of research on the price elasticity of demand for food. American Journal of Public Health, 100(2), 216-222. https://doi.org/10.2105/AJPH.2008.151415

Mankiw, N. G. (2021). Principles of microeconomics (9th ed.). Cengage.

Mullally, C., & Lusk, J. L. (2018). The impact of farm animal housing restrictions on egg prices, consumer welfare, and production in California. American Journal of Agricultural Economics, 100(3), 649-669. https://doi.org/10.1093/ajae/aax049