Friday, November 21, 2008

The Rise of Campbell Soup

We have to see this from the point of income elasticity of demand (YED). YED measures the responsiveness of demand for a good to a change in income. It is given by the formula of:

YED = (% of change in quantity demanded) / (% change in income)

We have 3 situations:

(1) YED greater than 1 (luxury good e.g. international holiday, designers’ clothes). As income increases, quantity demanded for a good will increase by greater than proportionate. For instance say rise in income of 10% causes the quantity demanded for that good to increase by 20%. So YED = 2 (it works vice versa)

(2) YED between 0 & 1 (necessity e.g. vegetables, newspaper etc). As income increases, the quantity demanded for that good will increase, but LESS than proportionate. For instance, again rise in income of 10% will only cause the quantity demanded for that good to increase by 7%. Therefore YED = 0.7 (vice versa)

(3) YED is negative (inferior good e.g. bus travel, potato, crush grain). As income increases, there will be a fall in the quantity demanded for such good. Say, income goes up by 10%, the demand for it will fall 25%. Thereby the YED = -2.5 (vice versa)

The case for Campbell:

In US generally there is a decline in households’ income. However, the demand for Campbell Soup as a form of cheap meal in period where more people opt to eat at home surge dramatically. A top analyst in Bloomberg raised the valuation of its share price to $44.50 or 26% higher than the current $35.42

This is a strong evidence to claim Campbell Soup is an inferior good. But of course, its sales will drop in the period of economic recovery.

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