Vanilla Ice Cream and Elasticity
We've been warned that the price of vanilla ice-cream could rocket as bad harvests mean a shortage of vanilla pods. But as good economists will know, the key word is "could". So what are the factors that mean we might not see a price hike this summer?
Inelastic Supply
The supply of vanilla is inelastic. It takes between 3-6 months for the curing process to take place and there is a small window of opportunity to pollinate a vanilla pod. With a bad harvest, it is obvious to see why the price of vanilla has doubled in price and is now the second most expensive spice in the world after Saffron.
Inelastic Demand
The demand for high quality vanilla is fairly inelastic. Even though there are a few countries that produce vanilla, it is the Madagascan vanilla that is most sought after - it is very difficult to substitute its distinctive flavour. There are synthetic substitutes being produced but these do not offer the same quality as the real thing.
When you combine inelastic demand and supply curves and shift supply to the left or demand to the right, the price will indeed rocket and this is clearly the case with vanilla - but will it lead to a huge rise in the price of vanilla ice-cream?
New flavours?
The most obvious question to ask is whether a high price of vanilla ice-cream would lead to consumers choosing another flavour instead. Research from Sainsbury's suggest people in Yorkshire would be most concerned about the rise in vanilla, but Ocado suggests it will be all of us!
One thing is clear, with salted caramel on the rise, there are a number of different flavours that UK ice-cream consumers like and vanilla ice-cream producers might find it hard passing on the increase in costs in the form of higher prices.
If cost really does become prohibitive, producers may find themselves swapping to the synthetic substitute.
Although David Bishop, production manager from New Ice Cream, suggests customers would notice the difference, you could argue that customers might notice the increase in price first. And as the Guardian points out, early harvesting of vanilla has produced a fall in quality - and that would make the synthetic vanilla even more viable.
And if consumers and producers both change their minds on vanilla, then we might not see a rise in the price of ice-cream this summer after all.