Friday, January 28, 2011

EBT (food stamps) and Fast Food: Implications for Market Demand

At some point in 2010 I started noticing different fast food restaurants in California, both in the SF Bay Area and Los Angeles County offering to accept payment via EBT (Electronic Benefits Transfer for food stamps programs). This is a change from the prior rules wherein EBT could only be used for unprepared food e.g. from the grocery store. Now under different programs such as Los Angeles County's Restaurant Meals Program, it is now possible to use food stamps to get fast food, e.g. pizza from Pizza Hut. Before I get into the possible positive and negative effects of this change in policy I want to explain the effects of this change on the market equilibrium for fast food.
In short, this change in policy creates a kink in the demand curve for fast food, as low income EBT recipient customers increase their demand, while demand by higher income customers does not change.
Consider two fast food buying customers. Person A earns an income that disqualifies him from EBT. Person B earns a low enough income to qualify for EBT, and has chosen to receive those benefits.
Here is person A's demand curve:

You can see that if fast food was practically free, Person A would consume 20 meals per month. Also notice how, because he has the budgetary capacity, at a price of $12 per fast food meal, Person A would still buy a small quantity of fast food per month at this high price.
Now consider Person B's more modestly budgeted demand curve. This is person B's demand for fast food meals before the change in policy that allows him to purchase fast food with EBT.

Notice how at a price of $12 per meal Person B will not buy any fast food meals. This is beyond his budget at this point. So what happens to Person B's demand curve when suddenly he can use EBT to purchase these meals? This change in policy will shift his demand curve for fast food to the right, because he will now be more able to purchase fast food meals at various prices. Here's his new demand curve:

We have now seen the effects of this change in policy on two individuals, one on food stamps and one not. But what about the market demand curve? And what does this mean for market equilibrium (the point where the quantity demanded equals the quantity supplied)? Let's find out. Because the market demand curve is the summation of all the individual demand curves, just imagine adding together all the demand curves for all the Person A-s and Person B-s of the market. Let's say the demand and supply curves before the policy change look like this:
The market price is at P1 and the quantity sold is at Q1. Suddenly the county government for this market allows EBT to be used to buy fast food. What would this do to the demand curve? Because higher income, non-food-stamp recipient customers like person A can affect the entire market demand curve, from the highest prices to the lowest, and lower income food-stamp recipient customers like person B would tend to only affect the lower parts of the demand curve, when EBT is suddenly allowed for fast food purchases, it is only the lower parts of the demand curve that will shift outward (in reality the change would probably not be this prominent but I have made it prominent just for demonstration). Here is the new market demand curve:
The result is a kink in the demand curve pushing out at the point where most food stamp recipients would be priced out of the market. Assuming the supply curve is below that point, this increases the equilibrium price to P2 and the equilibrium quantity to Q2. Thus this policy is a good thing for fast food companies, increasing their revenue by the amount of:
So what is the significance of the kink in the demand curve? Probably nothing in today's market, because fast food prices usually stay so much in the lower level that the portions of the demand curve higher than the kink will not come into play. In effect the shift is probably more like a shift of the entire demand curve, because the upper reaches may not even matter for equilibrium. However, if there were suddenly massive supply shocks in the inputs for the supply of fast food, e.g. global potato crop failure, the price might go high enough that more and more Person B-s actually get priced out. Let's hope that doesn't happen anytime soon. Nonetheless it's interesting and worth noting that (at least according to my reasoning) the whole demand curve does not shift, just the lower portion.
Now that I've looked at my graphs, what do I think of this policy?
I'm conflicted on this issue. Fast food is usually bad for you (except for the notable example of Subway). Nonetheless, a food stamp recipient can find food that is just as bad at the local grocery store. There is nothing in the law to prevent a food stamp recipient from using EBT to eat nothing but sticks of butter and Captain Crunch cereal. Also, for homeless food stamp recipients, lacking kitchen tools, buying prepared food can be the easiest way to get a hot meal. The issue here is how paternalistic does one want their government's social welfare programs to be? There is no demand and supply diagram that can easily find the best answer to this question. From my political preference, I am more on the side of allowing EBT purchases of prepared food. Not all of the poor will give themselves heart disease because of this policy change. Some will. But really this is a seperate issue. More nutritional education, (Public Service Announcements etc.) is the key to getting people to demand less junk food in the first place. Thus the "invisible hand" would force fast food companies to offer better choices. Ever since the movie "Super Size Me", I think we've already seen this happening.
I honestly don't know what the best policy is in this case. All I can say is, from just looking at the demand and supply curves, this is a great policy for fast food companies' profit margins. It is also bad for the profit margins of grocery stores who no longer have a monopoly on EBT food transactions.

Monday, January 24, 2011

How Not to Package Your Product

What's wrong with this picture?

Okay, I admit it. This article is not my best example of hard hitting in-depth economic analysis. Its more an excuse for me to post a funny picture I took at a Walgreens today, (kind of like my last article about that bizarre viral billboard campaign). However, I will say that this picture, taken from the package of a bargain plug-in video game console, is a great example of how not to package a product. Just one more quality-control step could have prevented this confusing and humorous design choice. Sometimes all it takes is a second pair of eyes to notice something like this.

Or perhaps this wasn't a mistake. In the rush to bring this bargain product to market, the packaging team might not have had time to take (or photoshop) a picture of a kid playing the game plugged into a backseat television screen, and whoever gave the go-ahead on the package design just said "eh, that's good enough." Whatever the case, the result is a barrel of laughs!

But I'll take this a step further. I think this kind of mistake is emblematic of the "death of the proofreader" a phenomenon brought about by the advent of spelling and grammar checking software. I am not an anti-spellcheck luddite, but it's just a matter of fact that before spellcheck and grammarcheck, a second pair of eyes was a necessary part of copy writing for packaging and other media. But that second pair of eyes can be expensive, and for many tasks, digital checking can be superior. However, problems arise because computers cannot easily deal with the meanings behind words. For example, to a spelling and grammar checker the sentences "They had a fight" and a corresponding typo "They had a fig" are equally valid. It would take a proofreader to recognize that error, just as it would take a proofreader to recognize that the kid in the second picture is playing his game on a tv stand, which is rather hard to do in a car.

(I sure hope there are no typoes in this article.)

Thursday, January 13, 2011

Weirdest Billboard Ever?

I was driving in West Los Angeles today when I came across a billboard so strange I could hardly believe my eyes. From a distance I could see the words "Win a Free Booby Prize", next to an image of a voluptuous woman. At first I thought this was some kind of off-color strip club or plastic surgery advertisement. Boy was I shocked when I drove closer and saw that that the woman on the billboard had a blurred Jesus face!!!!!
So, why does this belong on an economics blog? It does because this is a great example of today's trend towards "viral" marketing. The makers of this billboard, whether they are plastic surgeons or eccentric Christian missionaries, are counting on people like me being so baffled by this ad campaign that they will go to "" to find out what the heck is going on. And by posting this picture and writing about this I am playing right into their hands. But I can't resist. It is too bizarre to ignore.
This may turn out to be a success for whatever organization put this billboard up. I'm certainly curious. And if it is a success, there may be imitators with even more shocking and baffling billboards. But to return to a theme I've been talking about a lot lately, this type of bizarro billboard campaign would probably only be successful a few times. Imitators would face diminishing returns as the novelty of such ad campaigns wore off among the public.
So what is Free Booby Prize? I'm curious, but perhaps not curious enough to go to their website, because then I would officially be a sucker to this billboard.

Sunday, January 2, 2011

How Did My "Saw 3D" Prediction Hold Up?

A few months ago, I wrote an article using regression analysis, (let me rephrase, simple and not-so-scientific regression analysis) to predict the box office results of the seventh Saw movie, "Saw 3D". The quantitative model predicted a gross of $17,047,984 in line with the diminishing returns witnessed with each of the last five sequels. But I disregarded this figure in favor of a vague prediction that the film would be much more successful than that, due to its being released in 3D. As it turns out, my vague and non-commital prediction came true. Saw 3D grossed $45,710,178, which was about 20 million dollars more than its non-3D predecessor, and much more than the model predicted. This movie bucked the trend of diminishing marginal returns for sequels and the introduction of 3D into the franchise is probably the reason.
So does this mean that new Saw movies will be successful as long as they are released in 3D? No. 3D film itself will probably succumb to diminishing marginal returns soon, and by the time halloween rolls around this year, experience may have shown that the 3D fad is as dead as John the Jigsaw Killer. In which case it may be more profitable to take this franchise straight to DVD.