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SEMESTER 1, 2018 ASSIGNMENT COVER SHEET

Introductory Economics ECON1000

Student Name: EMMA SHAW Student ID: 19502896

Tutor’s Name: Sandra Jakova

Day & Time of Tutorial: THURSDAY 1PM

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Table of Contents

1.0Introduction 3
1.1Article Summary 3
1.2Essay over view 3

2.0Article Analysis 4
2.1Demand and Supply 4
2.2Elasticity and Total Revenue 6
2.3Consumer and Producer Surplus 6

3.0Conclusions 7

4.0Reference 8

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 1.0 Introduction

1.1 Article Summary

The news article, “The case for a Junk Food Tax in America”, published on the 6th of April
2018 for Vox Media by Julia Belluz, dives into the change on the demand of the junk food in
Mexico. Junk food has become a massive part of an individual’s life in Mexico, with over 15
– 20% of one's food budget consisting of junk food and 5-7% spent on sugary beverages (
Belluz 2018). This over indulgence in junk food has played a massive toll towards the health
of the citizens of Mexico. Mexico is ranked in the top 10 most overweight counties in the
world, with 33% of the population being obese and 70% of the population being overweight
(Renew Bariatrics 2018). As a result of the increasing rates of obesity in Mexico and junk
food becoming a prominent part of individuals diets, in 2013 a sugar tax was imposed. An
8% tax was inflicted on all “non – essential” food items with greater than 275 calories per
100 grams. This encompassed; confectionary, snacks, cereals and chips. This article
additionally examines the economic consequence due to the tax towards Mexican consumer
and produces (Belluz 2018).

1.2 Essay Overview

The purpose of this essay is to investigate the actions emerging within the junk food industry
in Mexico such as the sugar tax. This will be examined by using theories and concepts
derived from microeconomics. The effects of demand and supply of junk food from sugar
taxes in regards to consumers and produces will be explored. The increase in price of non-
essential foods and decrease in demand disrupting the market equilibrium and the elasticity
and total revenue of junk food will be discussed throughout the paper.

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2.0 Article Analysis

2.1 Demand and Supply

Demand is a common term used to determine a consumer’s willingness to pay for a product
or service, the desire or need to obtain the product or service. Demand in economics is
referred to the number of services or good are purchased during a certain period of time and
numerous prices. Economic growth is derived by demand, as there individuals wants are
never satisfied leaving room for economic growth and expansion. The main determinant of
demand is the price of a good or service. Price and the association with quantity demanded is
governed by the law of demand. The law of demand states that if the price of a product
increases, quantity demanded will decrease, inversely (Brennan 2018a). The law of demand
represents the opposite affiliation between demand and supply.

Other factors that impact demand of a product or service include; income, tastes , population
and demographics, prices if related goods and expected future prices (Khan Academy 2018).
In the article “The case for a Junk Food Tax in America” the factors of taste, price of related
good and income. Many individuals purchase junk food due to the satisfying taste in
comparison to healthy foods such as vegetables and staple foods. Taste is additionally affect
by the heavy advertising of junk foods such as; McDonalds and Burger King. The article
found that individuals with low income, consume the most junk food as it is the cheapest
option to satisfy hunger.

Decrease in demand of junk food

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The article gave a direct focus on the 8 percent increase of price of junk food products due to
the tax made on all non- essential foods with over 275 calories per 100grams. This increase
on price will create a shift on the demand curve for junk food. In the article, due to the sugar
tax, individuals purchased an average of 5-7 percent less junk food in throughout the first
year the tax was inflicted (Belluz 2018). The increase in price created the demand curve to
shift to the left additionally decreasing quantity sold of junk food.

The connection between supply and demand is apparent within the article. The demand cure
has shifted to the left due to the decrease in demand from the increase of price effected by the
sugar tax. The supply cure has additionally shifted to the left as when the demand of junk
food decreases, supply will also decrease. Both factors have created a new market
equilibrium (Brennan 2018a).

Shift left in demand curve and supply curve causing new equilibrium. Quantity of junk food
shifts to the left

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2.2 Elasticity and Total Revenue

An important concept within economics is elasticity demand. The quantity demanded and
purchased by a product in reaction to the change in price is measured by the price elasticity
formula (Brennan 2018b).

Price elasticity demand formula (Ped) = % change in quantity demanded / % change in price

If the PEd is less than one, the demand is inelastic ad if the PEd is greater than one demand is
elastic. Junk food as a whole is an inelastic demand as there are very little substitutes for junk
food, only healthy foods such as fruit and vegetables. Although junk food as a whole is
inelastic, brands under the category such as McDonalds are very elastic as there is many
substitutes such as KFC and Burger King. The article itself does in fact give a percentage
change in price but does not provide a numerical change in quantity, there for the limited
information is not enough to calculate the PEd for Junk food in Mexico. A main determinant
in the elasticity of a product or service is dependent on how many or how easily it is to
substitute. If there are high substitutes then the product of service will become more elastic
and will have a PEd greater than 1 (Brennan 2018b).

Price elasticity is significant for businesses as it permits businesses to estimate how much
their products or services are worth to consumers and to determine how changes in price may
disturb the total revenue. Products and services that are inelastic have the luxury or setting
high prices as the products are must haves and there are little substitutes. In the article junk
food as a whole is an inelastic product there for if all companies are forced to increase prices
by 8% consumers will still purchase the products as there are no substitutes(Investopedia
2018).

2.3 Consumer and Producer Surplus

Brennan (2018c) stated that consumer surplus is the difference between the highest price
purchaser’s readiness to pay and the actual price that they paid. Consumer surplus measures
the consumers net benefits of consumption. The zone underneath the demand curve and
above market price is symbolised as consumer surplus. Producer surplus is the zone above
the supply curve and beneath price. Producer surplus is defining as the cost of the good or
service minus the productions marginal costs.

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Due to the increase in price of junk food from a direct result of the sugar tax, the demand for
junk food has decreased along with a decrease in supply and a decrease in equilibrium
quantity. From these factors, producer and consumer surpluses has both changed. The article
found that consumers purchased 5-7 percent less junk food I the first year of the sugar tax.
Due to the decrease in demand for junk food, this will create a producer surplus of products
the junk food industry.

Consumer and producer surplus

3.0 Conclusions

The sugar tax has had an economic shift towards the supply and demand of junk food in
Mexico. Due to an increase in prices of products, demand has dropped 5-7 percent. With the
population of Mexico being over 130 million citizens (worldometers 2018) the drop in
demand will create a significant dent within the junk food industries. Obesity is a major
concern within the country of Mexico therefor the increasing the sugar tax will have a
positive outcome on the society as a whole. By reducing the consumption of junk food, will
reduce the rates of obesity related diseases, such as type 2 diabetes and heart disease
(guardian new and media 2018). Although prices of junk food will continue to increase in
relation to the sugar tax, as junk food is an inelastic good with little substitutes such as; fruit,
vegetables and staple products, consumers will be still willing to pay high prices to satisfy
consumer wants despite the high market price. Junk food such as; chips, sweets and chocolate
incorporates the majority of consumer’s households and products cannot be easily

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substituted. I believe that the government should increase the tax rates on high calorie
products, as it will decrease rates of junk food consumption and reduce obesity rates.
Although the tax will not cure or put an end to the obesity epidemic in Mexico, it will
challenge citizens and the population to take the healthier choice.

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References

Brennan, Andrew (2018a) “Lecture 2: Demand and Supply”, PowerPoint Lecture Notes.

https://lms.curtin.edu.au/webapps/blackboard/execute/displayLearningUnit?course
_i d=_77990_1&content_id=_4487571_1

Brennan, Andrew (2018b) “Lecture 3: Elasticity”, PowerPoint Lecture Notes.

https://lms.curtin.edu.au/webapps/blackboard/execute/displayLearningUnit?course
_i d=_77990_1&content_id=_4487582_1

Brennan, Andrew (2018c) “Lecture 4: Economic Efficiency”, PowerPoint Lecture Notes.

https://lms.curtin.edu.au/webapps/blackboard/execute/displayLearningUnit?course
_i d=_77990_1&content_id=_4487593_1

The Guardian. 2018. Mexico's sugar tax leads to fall in consumption for second
year running (website). https://www.theguardian.com/society/2017/feb/22/mexico-
sugar-tax-lower-consumption-second-year-running

Investopedia. 2018. Elasticity (website).

https://www.investopedia.com/terms/e/elasticity.asp#ixzz5E8WTxPFJ

Vox Media. 2018. The case for a junk food tax in America (website).
https://www.vox.com/2018/1/17/16870014/junk-food-tax

WorldoMeters. 2018. Mexico Population (website). http://www.worldometers.info/world-

population/mexico-population/