Web Note 6.1: Elasticity and Cartels

Thinking about the different price elasticities of demand for various goods helps clarify why some cartels are relatively successful and others are not. In general, a cartel has a better chance of success when the demand for the commodity is highly inelastic.

OPEC:
OPEC (Organization of the Petroleum Exporting Countries) is often able to raise oil prices significantly by reducing output. Keep in mind that when the price of a good with inelastic demand increases, total revenue to the sellers also increases. Of course OPEC does not state things this bluntly on its own Web site.

Natural Gas:
Will natural gas exporters be able to form an effective cartel? Note the discussion of elasticities of demand and supply in Market Structure in the New Gas Economy: Is Cartelization Possible? (a 2004 working paper by Ronald Soligo and Amy Myers Jaffe)

If Only Cars Ran on Olive Oil:
Many, if not most, groups of commodity producers band together to form cartels, cartel-type organizations, and/or marketing boards. You can check the stated purpose of the International Olive Oil Council and/or the International Cocoa Organization at their respective Web sites. Then ponder why you have probably heard of OPEC but never -- before today -- heard of IOOC or ICCO. Note that, unlike OPEC, the IOOC and ICCO mount marketing efforts to increase the demand for olive oil and cocoa.

A Directory:
There are many more such cartel-wannabes. You can find information on many of them at the International Monetary Fund's Directory of Economic, Commodity and Development Organizations.

Web Note 6.2: Inferior Goods

A --fortunately rare -- type of inferior good is the Giffen Good. A Giffen good is an inferior good that absorbs such a large part of the consumers' income that an increase in its price leaves them with less to spend on preferable substitutes so they actually buy more of the Giffen good. This might occur with the cheapest food in a poor country -- if you spend half your income on rice and the price of rice increases, you cannot afford as much pork and chicken. So you make up the lost calories by buying more rice.

Article:
Economist David Mckenzie asks Are tortillas a Giffen Good in Mexico? (Economics Bulletin 2002) and concludes that they are an inferior good but not a Giffen good. The article is useful even if you skip over the equations.