Site icon Econ Eye

Cheerios Maker General Mills Cuts Sales As Price Hikes Hammer Demand

EconEye Admin

Price hikes, undertaken to offset steep input costs, primarily labor costs, have pushed consumers to buy smaller pack sizes for pantry staples and pet food, as well as opt for cheaper private-label alternatives.—Reuters, December 20, 2023

In this post, we look at the price hike that consumers face and use the model of demand and supply to see how consumers respond.

The Questions

In what market are Cheerios sold?

Cheerios are one of many cereals consumed for breakfast, so Cheerios are bought and sold in the market for breakfast cereals.

Figure 1 illustrates the market for breakfast cereals. The demand curve D shows the market demand and the supply curve S0 shows the market supply. Before the costs of producing breakfast cereals increase, the market price is $6 per box and consumers buy 100 million boxes a week.

What is a price hike and why has it occurred?

A price hike is an increase in the market price. The driving force of the increase in the market price of breakfast cereals and treat bars like Cheerios is the steep rise in the cost of the inputs used in their production.

When the cost of producing breakfast cereals increases, the market supply curve shifts leftward from S0 to S1 and the market price rises from $6 per box to $7 per box.

Does the price hike hammer the demand for breakfast cereals?

As the market price rises, consumers decrease the quantity of breakfast cereals demanded up along the demand curve. The quantity of breakfast cereals bought decreases from 100 million boxes a week to 75 million boxes a week. The demand for breakfast cereals does not change. The price hike does not hammer demand.

How does the price hike “push consumers to buy smaller packs and cheaper alternatives”?

As the market price rises from $6 per box to $7 per box, consumers look for alternative items for breakfast. What pushes consumers to buy fewer boxes of breakfast cereals and cheaper food for breakfast is the consumers’ budget and the rising price.

Now take a short quiz to ensure you understand what you just read.

Answer the following questions to check your understanding of the story.

How do the prices of inputs used in the production of breakfast cereals influence the market for breakfast cereals?

The rise in the prices of inputs influence ____________.

Wrong! - What is the effect of rise in the cost of producing breakfast cereals? Does the market demand or the market supply change?

Well Done! - The rise in the prices of inputs increases the cost of producing breakfast cereals. As the costs of production rise, producers cut production and the supply of breakfast cereals decreases.

As the market supply decreases, which of the following outcomes occur?

Wrong! - What determines the market price? How does it change when the supply decreases? Does the rise in the price change the demand for breakfast cereals or the quantity demanded of breakfast cereals?

Good Job! - Because rising costs decrease the market supply, the market price rises and hammers the quantity demanded in a movement up along the market demand curve.

Exit mobile version