The Laws of Economics and Beer
by Andrew Smith Jr.
Beer, like any good, follows the rules of supply and demand. If one of its ingredients, such as hops, gets more
expensive, the price of the end product can go up. If grain prices skyrocket due to increased demand for grain-
based ethanol to fuel vehicles, beer prices can go up as well. What makes beer unique is the way it reacts to
different economic conditions, and how your government regulates it
Is beer a "normal good", meaning that demand increases as income increases? Is it an "inferior good", meaning
that demand decreases as income increases (possibly because beer drinkers switch to wine)? Is it a "luxury
good", meaning that demand increases outstrip increases in income? That all depends, though research tends to
support the idea that beer is a normal good. The beer industry is not homogeneous: there is a wide array of beer
types available at different price points. This means that each segment of the overall beer market may react
differently to economic cycles. Brewing as an industry is often considered "recession proof." For example, the
stock of major beer-producing companies actually rose during the dotcom bust of the late 1990s. However when
it comes to the basics at the grocery store beer seems to almost fall into the "can live without" category. When
times get tight there isn't necessarily a drop in demand; but a shift to a different type of demand. Consumers
switch from more expensive beer to the less expensive varieties, just like consumers switch from name brand
goods to the store-brand version. The consumption is there, but it's of the cheaper alternative.
Not only do recessions prompt consumers to switch from more expensive brews to more affordable ones, new
demand is also coming from some unlikely sources: wine and liquor drinkers. Not only do recessions prompt
consumers to switch from more expensive brews to more affordable ones, new demand is also coming from some
unlikely sources: wine and liquor drinkers. When one considers the total market for alcohol-based products, wine
and spirits have traditionally been sitting on the more expensive end of the scale. Consumers still looking for a
certain level of luxury in their alcohol purchase seem to consider some beers as a viable alternative. One way that
brewers have tapped into this trend is by offering beers with higher alcohol content, and by emphasizing the
exclusivity of craft beers. This is not so dissimilar from any other industry, since suppliers will create new product
offerings in order to meet burgeoning demand.
As is the general rule in economics, if demand for a certain beer is greater than the amount that the brewer can
pump out, prices will be higher. Larger brewers benefit from economies of scale; they are able to procure
materials in bulk, have easier access to efficient transportation (beer available in more markets) and can produce
a large volume of beer. This is a major factor into why mass-produced beer is less expensive than craft beer.
Another factor in the cost of beer and other alcoholic beverages concerns government regulations. Unlike
carbonated beverages, fruit drinks and almost any other drink you can think of, the supply of beer is closely-
monitored by local, state and federal governments as a "vice." Municipalities regulate the sale of alcohol, either
through state-sponsored stores, taxation or other limitations, in order to raise funds or to control the prevalence
of alcohol among residents. Political reasons aside, this can have a dramatic effect on the supply of beer, which in
turn can increase its prices. Limiting the number of suppliers, such as grocery or convenience stores effectively
reduces competition, which in turn can increase the price of the good. Furthermore, there are numerous states in
which the government still controls all alcohol distribution. You will have no difficulty finding arbitrary, bizarre, and
overtly protectionist alcohol laws in nearly every state in the union. From Virginia’s food-beverage ratio law, which
arbitrarily mandates how much booze versus food a restaurant can sell, to Indiana’s cold beer law, which only
allows liquor stores (but not gas stations or grocery stores) to sell refrigerated beer, the examples are legion..
Some people also cite the three tiered system as a factor in the price of beer. Nearly every state uses it for
alcohol distribution. It is a system that maintains a strict wall of separation between alcohol producers, distributors
and retailers. It came about after Prohibition. What is interesting about this system is that it requires all alcohol
(there are a few exceptions) to pass through a middleman. The main reason for the system being set up this way
was to limit the ability of the producers, such as brewers, to own the primary aspects of the industry: production
and retail. The fear was that if big producers controlled everything (like a Standard Oil of alcohol), then consumer
choice would be limited and everyone would be worse off. While this has worked to some extent, the regulation
has created a number of headaches and leads to higher prices. How much higher? Well, thanks to their legally-
mandated monopoly, distributors generally mark beer up drastically — 50 percent is normal.
As with any product there are inherent costs in making beer. Click on the chart on the right to see
the costs per each component for a typical six pack.
Note on the chart - "margin" is not the same as mark up
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