Americans Really Like Eggs
It takes huge prices increases to convince people to cut back.
The price of eggs keeps going up, yet people keep buying them. In fact, it works the other way: the number of eggs keeps going down and the price increases to encourage people to cut back.
The number of laying hens is down 4% in the last year due to avian flu. Because there have been few imports, the price had increase until consumers cut back by 4%. The more you like your eggs, the bigger price increase it takes to get you to cut back. It took a 228% price increase to induce a 4% cutback. That’s a demand elasticity of -0.02.
For each January since 2013, the graph below plots the percent change in price over the prior year against the corresponding percent change in quantity. It shows that a 1% drop in supply generates a 17% price increase, on average. That’s a demand elasticity of -0.06. It’s not as small as -0.02, but it’s still really small.
The line in that graph looks flattish because of the scale. Let me put the two axes on the same scale, so you can see how steep the demand curve really is.
Egg demand is inelastic because there are few good substitutes and it doesn’t take up a huge portion of most people’s budget. The average American eats about 6 eggs per week. It can be frustrating to pay a couple of extra dollars a week for eggs, but the low demand elasticity shows us that most people are willing and able to do it. They can afford it and they don’t want to eat chickpeas instead.
For comparison, this USDA Economic Research study reports much larger elasticities for most food products, with dairy as the notable exception.
The low demand elasticity means that most egg producers are making big profits. It’s tempting to accuse them of jacking up prices to acquire these profits, but that is not the right way to look at it. Prices are going up because we have fewer eggs and people don’t want to reduce their egg consumption.
We can blame egg producers directly for excessively hiking prices, but it is worth noting that the low demand elasticity blunts their incentive to guard against bird flu. A little bit of bird flu means higher profits for anyone whose flock isn’t wiped out. An important policy focus should be building resilience against the flu.
If egg prices stay high, then it’s possible that consumers will start to switch to other products. But, for now, we will have high egg prices for as long as the avian flu epidemic continues.
I made the graphs using this R code.
Econometrics Nerd Addendum
I estimated the elasticity by regressing the percent change in price on the percent change in in quantity using the 13 annual observations depicted in the graphs above, and then inverting the coefficient (as in this paper). I used annual changes to strip out the seasonality. Needless to say, this is not a precise estimate, but I think the evidence is clear that the elasticity is very small.
I did the same elasticity calculation using the number of layer hens to measure quantity instead of the number of eggs produced. The number of hens is a better indicator of forthcoming supply, so it is possible that prices respond to the number of hens rather than the number of eggs produced. I got an elasticity of -0.05.
You might question whether I am truly identifying a demand curve here, i.e., you’re wondering whether production changes are exogenous to price. If the changes in production were driven by consumers’ changing taste for eggs, then my price-quantity graph would be upward sloping and it would reveal how much the price needs to increase for farmers to produce more eggs (a supply curve). If both things are going on, then I’m estimating a hybrid supply-demand curve and the demand elasticity is larger than I am claiming. If you used monthly data and accounted for seasonality, then you could estimate the demand elasticity using avian flu incidents as an instrumental variable. I think it’s obvious that the driver of production variation has been avian flu, and so I’m confident in saying that the egg price elasticity is low.