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Elasticity of Demand in Action: Sugary Drink Demand and Higher Prices

Geoff Riley

17th October 2017

This article on (limited) research into the effects of higher prices for sugary drinks at Jamie Oliver's restaurants might be used when discussing price elasticity of demand and also the importance of the ceteris paribus assumption.

Background

In September 2015, Jamie’s Italian, a national chain of UK restaurants, added a £0.10 levy to the price of non-alcoholic sugar-sweetend drinks sold within them. The levy equated to a price increase of 3.1%–3.8%. 

In addition, fruit spritzers (fruit juice mixed with water) were added to the main non-alcoholic beverage menu. Information in the beverage menu explained the decision to implement the levy and that proceeds from the levy would go directly to a Children’s Health Fund that offered grants for children’s health initiatives.

Thus, the levy can be seen as a complex ‘intervention’ comprising a fiscal component (a price rise) in combination with other non-fiscal components that could plausibly help reduce purchases of sugar sweetened drinks.

Source: Research report

The limitations of the research are highlighted in the BBC news article - students can be encouraged to identify them.

Whilst on the surface, higher prices did contribute to a price elastic response from consumers, it appears that there were several factors at work including attempts to nudge consumers into making healthier choices.

It is often hard to calculate accurate price elasticities of demand when multiple factors are having an influence on consumer tastes, preferences and final choices.

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

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