Question

Business 101 (Textbook: Exploring Business, v. 2.1)

WHAT'S GOING ON HERE?

Marcia Howard is a clerk at a local dress shop and her husband is a delivery man for a major courier service. Their combined income is not extraordinary, but with a little economizing here and there, they do fine. One area in which Marcia takes particular pride is the attention she pays to prices at the supermarket. By knowing the prices at different stores -- and taking advantage of specials -- Marcia saves a decent amount of money on the Howards' food bill.

In recent weeks, Marcia has noticed that the prices of bakery goods have risen significantly. A loaf of bread that cost 87 cents two weeks ago, now sells for 99 cents. Similar increases were apparent for cakes, cookies and other baked goods.

At her last visit to Safeway, Marcia asked the manager why prices on these items had risen so much. Having been bombarded with such complaints for most of the day, he replied briskly, "It isn't us, it's the producer. They raised their prices to us, so we have to pass the increase on to our customers."

Marcia wondered about this all through dinner that evening. Coincidentally, the news was on while she and her husband were eating. Two features caught Marcia's attention. First was a piece on the cost of living, which the newscaster reported to be up. He then went on to say that a good part of the increase was due to last summer's drought in the Midwest which reduced wheat production.

The second feature was part of a week long series on the former Soviet Union. In this segment, the reporter visited a Soviet food store and interviewed several customers and employees. They offered some contrasting opinions on developments since the decline of communism. Some spoke favorably on the availability of products in the market place. "Before, you could only buy what the government produced. Often, there were limits on how much you could buy, and, almost always, you were forced to wait in long lines to buy what little was in the store," one employee remarked. A customer took exception. "Yes, but prices were low then. I remember when bread was 39 cents a loaf. And, it stayed at that price for years. Today's high prices make it very hard for a fixed income citizen like me." Prices had indeed reached levels for some products that were higher than in the United States. Marcia thought there was probably some truth in both opinions - she would love to have low prices, but not so eager to spend hours trying to buy a limited selection of products.

Marcia relates all this to you when you have coffee after aerobics class, and asks you what's going on. Please explain to Marcia why you think prices are rising here in the U. S. and how things have changed in the former Soviet Union.

Answer 1

First I will educate Marcia about reasons behind this phenomenon as we know that inflation is caused by several factors. Generally in US prices of food items depend on four factors. They are oil & gas prices, US government’s agriculture policies, WTO Limits & supply shocks due to natural calamities or whether conditions.

Oil & gas prices: If we look the history of oil & gas prices in past decades they have consistently risen. High oil & gas prices raise transports costs. High oil prices also increase production costs which forces producers to increase prices of products.

US agriculture policies: Since US government has subsidized corn production for bio-fuels, it takes a good amount of corn out of food supply. This has also added pressure on producers due to limited availability of corn. Also regulations restricting use of pesticides & fertilizers results in poor crop yields. In some parts of US government is paying farmers not to plant to save water which reduces food supply.

WTO limits: Since WTO sets limits puts restrictions on agriculture subsidies it creates price volatility in the market though US has heavily subsidized agriculture industry.

Weather conditions & natural calamity: weather conditions & natural calamities like storms & drought create negative supply shocks in the economy. As it’s already discussed in article that last summer's drought in the Midwest reduced wheat production. So natural disasters limit the ability of producers to supply which results in price rise.

Since Soviet Union was a communist economy all the means of production were held by government which controlled production, prices & supply of products to a great extent. Since government owned all the resources it maintained prices significantly low but failed to provide quality & quantity as per demand.