top of page
  • joeybunag9

The Economics of Chocolate Part I: On Elasticity

I have fond memories growing up after visiting Hershey Park in Hershey, PA.  My nine-year old self was in chocolate heaven upon seeing the whole town practically screaming chocolate at every turn. The chocolate tour was one of the best parts, where you get to learn its history, where cacao beans come from and how they end up as one of the world’s favorite treats out there.  And it doesn’t hurt that a chocolate treat is practically offered everywhere you go.

Chocolate has gone a long way since it started in Mesoamerica (present day Mexico), where it looked and tasted very much differently from the one that we know today.  Chocolate was served in liquid form during rituals usually before going to war or for medicinal purposes.  This foamy liquid isn’t like your typical hot chocolate—it was in fact very bitter, earning it the name: “xocolatl” which means bitter water.  Chocolate made its way to Spain via Cortes, then eventually to Europe which was then just enjoyed by aristocracy.

Chocolate has come a long, long way from its very humble roots 4,000 years ago.  For many of of us, chocolate has been part of our daily lives as well as special occasions like Easter, Christmas, Valentines Day and Halloween.  


In recent years however, the price of cacao beans have gone up steadily which has led to increases in prices of chocolates.  The question though is whether the demand for chocolates is expected to decrease in light of these price increases.  This is where elasticity of demand comes into play.


The Price Elasticity of Demand is defined as the measurement of the change in demand for a product in relation to the change in its price. In equation form, it is defined as:

Demand for a product can be elastic or inelastic. Using the above formula, the resulting elasticity of a product has possible results.

Price Elasticity of Demand (absolute values)

Result

More than 1

Elastic

Equal to 1

Unit Elastic

Less than 1

Inelastic

Let’s say that the price of movie tickets go up by a dollar, we can expect that the quantity of movie tickets purchased will be far less than the magnitude of the price increase. Think of it as a more inflated aka more elastic reaction to the price increase.  Contrast this with the price increase of bread where the quantity purchased will certainly fall but not in the same magnitude.  Why, you may ask? Well, bread is considered more of a necessity, i.e. a need versus a want like movie tickets.  So if your income is limited, you would reallocate your dollars towards those things like bread, groceries and other basic necessities.


So, is chocolate a need or a want? It is widely believed that overall, the demand for chocolates is inelastic, but the answer could be, it depends on the brand, that is.


A study conducted by UBS in 2018, found that the more upscale chocolate brands like Lindt, and Cadbury have inelastic demands, while Kitkat and Reese’s Peanut Butter Cup tend to be more elastic.  So brands like Lindt can raise prices without feeling much of a pinch in their demand and bottomline.

It’s interesting to note though that Reese’s seasonal Easter Eggs have an inelastic demand.  Could this be why chocolatiers offer seasonal items similar to Starbucks offering its pumpkin spice latte for a limited time?


And there is reason to believe that yes, chocolates are more inelastic as a whole.  In fact, a huge majority of households purchase chocolates once a month regardless of income levels.  


So while there are expected price increases in chocolate looming in the horizon, there is no need to panic quite just yet as you will see in part 2 of this post.


In the meantime, enjoy your salad, I mean, chocolate!




























Image Sources:

11 views0 comments

Recent Posts

See All

Comments


bottom of page