Elasticity: A Measure of Response
Responsiveness of Demand to Other Factors
Case in Point: Various Demand Elasticities for Conventional and Organic Milk
Peruse the milk display at any supermarket and you will see a number of items that you would not have seen a decade ago. Choices include fat content; with or without lactose; animal milks or milk substitutes, such as soy or almond milk; flavors; and organic or conventional milk. Whereas in the 1990s only specialty stores stocked organic milk, today it is readily available in most supermarkets. In fact, the market share for organic milk has grown, as sales of conventional milk have been fairly constant while sales of organic milk have increased.
Professors Pedro Alviola and Oral Capps have estimated various demand elasticities associated with conventional and organic milk, based on a study of 38,000 households. Their results are summarized in the following table.
| Elasticity Measure | Organic Milk | Conventional Milk |
|---|---|---|
| Own-price elasticity | −2.00 | −0.87 |
| Cross-price elasticity | 0.70 | 0.18 |
| Income elasticity | 0.27 | −0.01 |
Organic milk is price elastic, while conventional milk is price inelastic. Both cross-price elasticities are positive, indicating that these two kinds of milk are substitutes but their estimated values differ. In particular, a 1% increase in the price of conventional milk leads to a 0.70% increase in the quantity demanded of organic milk, while a 1% increase in the price of organic milk leads to an increase in the quantity demanded of conventional milk of only 0.18%. This asymmetry suggests that organic milk consumers have considerable reluctance in switching back to what they may perceive as a lower-quality product. Finally, the income elasticity estimates suggest that organic milk is a normal good, while conventional milk is an inferior good. As might be expected, in the sample used in the study, purchasers of organic milk are more affluent as a group than are purchasers of conventional milk.
Being a fairly new product, organic milk studies are just becoming available and the authors point out that other researchers using different data sets have calculated different values for these elasticities. Over time, as more data become available and various studies are compared, this type of work is likely to influence milk marketing and pricing.