28 October 2009

Why does produce cost less than packaged food?

This [unedited] guest post is by a student in my EEP100 class (background post).
Please praise/critique/comment on its economic quality and importance to you.


Shelley Woo says:

The crazy thing is that fresh healthy and delicious produce costs so much less than processed unhealthy packaged food. Now, how does that make sense? Don’t we usually pay more for a healthier option like purchasing organic or natural foods? I find this so interesting because I would expect to pay a high price for fresh fruits and vegetables that were on a farm a couple days ago. Now what we don’t think about is the packaging cost and marketing for the packaged product to be sold. With packaged products, there must be some appeal or special aspect that the product can offer. So the extra variable cost can get expensive, so the consumer ends up paying more for their product. Whereas fresh produce that comes from directly from the fields and into the supermarket, it takes less cost to sell it because most fruits and vegetables are more or less the same. There isn’t as much as a difference in the way it looks unlike packaged products. If a person wants to buy a banana, they would just buy the cheapest one and as every banana company competes with the other, the price is driven down because there is not much a difference between the
two goods.

Bottom Line: The extra cost in packaging products makes packaged food more expensive than produce which comes directly from the fields and ready to sell, so buying produce is a real bargain and contributes to a healthier diet.

2 comments:

Tim in Albion said...

Certainly agree that fresh produce is a bargain, especially so as it is "real food." But your essay implies that consumer prices are mostly determined by producer costs - an assumption that should have been questioned and validated. Seems likely that marketing has a lot to do with it! Cf. Michael Pollan for some discussion of the marketing power of the processed-food-products industry vs. the fresh produce industry. Bottom line: Consumer prices may be determined by consumer preferences, which are subject to influence from advertising. Producer costs set price floors but often have little to do with retail pricing.

dWj said...

What Tim said. Just because you spend more producing your product doesn't mean the consumer is going to pay you back for it. In competitive markets, your costs don't determine your price; your competitors' costs determine your price. In either competitive or noncompetitive markets, though, demand curves matter, too; someone must be buying the more expensive option. The best reason I can imagine, aside simply from habit, is that it's easier to store; fresh produce has to be acquired again every few days.