Manon's Econ Blog

Bread war: the lost of Hovis

Posted on: November 9, 2009

hovis_1351299c

The increase in price of wheat and raw materials forced bread companies to increase the price of bread. However, out of the three comanies competing, Hovis, Warbutons and Kingsmill, only Hovis increased their prices in September. The other two companies waited till December to do so. Nervertheless, the demand for Hovis bread was too elastic, and as the price increased the quantity demanded drastically decreased.

Hovis bread

The other two companies waited till December to increase their price of bread. Since the demand for Hovis bread decreased demand for Warbutons and Kingsmill bread increased (they are subsitute goods) as shown on the diagram below.

hovis related price

Then, in December, as the price of wheat still increased, Warbutons and Kingsmill decreased their supply, but the change is demand was not as drastic as Hovis since it increased back in September (as shown on the diagram below).

Warbutons and Kingsmill bread final

The dashed lines are a reminder of the increase in demand. As we can see on the diagram above, price increased but the quantity demanded did not decrease compared to the original position.

 

 

Because of the economic recession in the world since a couple of years, people’s income have decreased. For the Hovis bread, as income decreases, the demand decreases too; therefore Hovis bread is a normal good, since if we apply the formula for Income Elasticity of Demand (YED= (% change in demand) / (% change in income) ), the result will be positive.

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