The effect of tariffs is dependent on the price elasticity of demands as well as the price elasticity of supply. Often, tariffs have a significant influence when the supply and demand are elastic. Fresh Foods on the Move engages in vegetables and fruits import from Mexico. The company then sells to large manufacturers for processing before later selling to U.S. grocery stores. The case indicates that the price elasticity of demand for food items in the United States is around 0.15. The level of price elasticity (price elasticity is less than 1) indicates that the demand curve is inelastic. An inelastic demand curve denotes a scenario in which elasticity is below “’ one,” highlighting reduced responsiveness to changes in price. For every 10 percent increase in fruits and vegetable price, the quantity of demand will decrease by 1.5%.
Because the demand curve is highly inelastic, indicating that there is a breakthrough in demand, which shifts demand to the right. In this case, there is a significantly lower price for fruits and vegetables. The impacts on the product quantity sold are also limited. Consumers would benefit more when the demand curve shows inelastic trends because the changes in the supply would result in lower product prices for the consumers. In this regard, Fresh Foods on the Move should pass on some of the tariffs to the consumer.
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The profit-maximizing strategy that Fresh Foods on the Move should adopt develops from the understanding that profit maximization occurs when the marginal cost equals marginal revenue. Balancing marginal cost with marginal revenue requires the company to continue increasing its product price by passing on the tariffs to the consumer.
References
Demand elasticities of oil demand per capita by region. (2008).
Fujita, K., Dale, L., & Fujita, K. S. (2008). An Analysis of the Price Elasticity of Demand for Household Appliances.
Gorman, W. M. (2013). Tariffs, Retaliation, and the Elasticity of Demand for Imports. Readings in Welfare Economics , 167-196.
Schofer, R. E. (2018). Elasticity of transit demand with respect to price :.
