Managerial economics refer to the criteria for rational decision making by managers of business enterprises. It focuses upon the criteria for making rational economic decisions in regard to the use of scarce resources. This is based on the theory of human consumption – that scarcity is the rule and abundance is the exception. A scarcity of something means that the total of human wants for it exceeds the quantity of it available for human consumption. This is where managerial economics should play – basically making choices in how to use their scarce resources as efficiently as possible in the satisfaction of human wants. Thus, decision making is important and should not be taken for granted in every business.
One of the industries that are seeing some growth over the past few years is the organic foods industry. However, this industry is an example of scarcity as the growing consumer demand for it cannot be easily satisfied. Supermarkets need to fight over the scarce of supply of organic foods in order to meet their consumer’s demand. Because of this characteristic of organic foods, it is interesting to examine how organic firms manage the economy of their products. One of the theories that support managerial economics is the theory of consumer behavior and demand. Like the managers of firms, consumers also engage in the phenomenon of deliberate, rational decision making. This is interesting to examine in the organic foods industry since the phenomenon of rational decision making here is greatly influenced by the attitude of consumers into health and how they perceive safety in foods. This paper will discuss the organic foods industry as well as the behavior of consumers toward it. Several managerial economics strategies of organic food forms will also be discussed. The aim of this paper is to bring about the element of managerial economics in the organic food industry by focusing on consumer behavior and demand for organic food products.
STATEMENT OF THE PROBLEM
The problem to be explored in this study is the behavior of consumers toward organic food products. As mentioned, the organic food industry is a growing industry that is scarce in terms of supplies. Non-organic products still dominates the organic food products. Furthermore, while there are many consumers who are already familiar with organic products, there are also many who are not yet familiar with it. As mentioned, managers must acknowledge two possibilities with respect to the information upon which the consumer must predicate the decision: the consumer either has perfect information about the possible alternatives to be purchased, or the consumer has some information but lacks knowledge of much that is relevant to the decision context. The expected value has to be determined. However, since there is no raw data that can be found about the specific consumers of organic foods, this paper will rely mostly on literatures, specifically academic research and the views of organic food firms. Thus, it is proposed that research on specific consumer behavior toward organic foods should be conducted, including a computation of their expected values.
AIMS AND OBJECTIVES
The aim of this essay is to propose a study that will investigate the behavior of customers toward organic food products and compute the expected values of those customers. In this current essay, all are based from literatures about organic foods industry in the United States.
The following are the objectives of this essay:
1. To provide a discussion about the organic food industry in the United States.
2. To define customer behavior.
3. To search and discuss literatures that provides examples of customer behavior in organic food products.
The Organic Foods Industry
According to the Organic Trade Association (2004), organic foods is by far the largest and most clearly defined part of the organic industry, grew 20.4% in 2003 and accounted for .38 billion in consumer sales. This shows that the United States has by far the largest market of organic foods (Kortbech-Olesen, 2002). Since 1990, sales of organic products have been growing 20% per year on average. Estimated growth rates from 2005 through 2010 range from 9% to 16% annually (Rawson, 2005). Rawson (2005) found that the high growth rate in sales of organic products can be attributed in part to the higher prices that organic producers and processors receive for their products, according to USDA economists.
However, the problem with this growing industry is evident because at present, only less than 1 percent of U.S. farmland is under organic cultivation (Stonyfield Farm, 2002). It shows that, based on the basics of economics, a growing demand may experience problems with limited supplies. While this is one of the concerns, another concern is customer behavior.
Organic means an ecological system of management that at its core relies on a healthy rich soil to produce strong plants that resist pests and diseases. Organic farming prohibits the use of toxic and persistent chemicals in favor of more “earth friendly” practices that work in harmony with nature and preserve biological diversity—the multitude and variety of life. Organic food companies are food companies that manufactures and sell organic food products. Some of the mainstream companies that now offer organic food product lines include Campbell’s, Dole, Hunt’s and Heinz. On the other hand, there are also fully-owned organic brands in the market. Some of them are: Westsoy; Walnut Acres; Breadshop; Farm Foods; and Nile Spice .
In Westsoy’s website, it can be seen that the company’s marketing strategy is straightforward – exposing the health and wellness that organic soy products provide to consumers. This is also evident in Walnut Acre’s website company provides a link to a webpage that explains the advantages of organic foods over non-organic foods. These companies basically focus on a basic consumer expected value, which is the healthiness and wellness they can get from organic products.
Wong (2000) argued that a customer evaluates a product or a service. Such action is based on the customer’s reaction from the using the product or service, which means that the product or service should leave a good perception to the customer to consider him or her satisfied. Frederick and Salter (1995) explained that it can be ensured that a customer is satisfied by taking into importance the customer value package, which includes: price, product quality, service quality, innovation, and corporate image. Others also stated the importance of maintaining or establishing a uniqueness of the product, while also understanding customers and what pleases them. Customers should also understand the product and be allowed to set their own standards in order to be satisfied. Furthermore, customers also like their requests to be processed quickly or taken into consideration.
The following are the basic concepts that should be understood in consumer behavior: expected vs. certain values of choices; comparison of actual outcomes to expected values; the behavior of the utility function; qualifications to the principle of diminishing marginal utility; and managerial implications of utility relationships. The expected value of a particular consumer choice is the probability-weighted average of all of the possible outcomes resulting from the choice. In the event that the probability of occurrence of one of the possible outcomes is 100 percent, then the expected value becomes the certain value of the choice. The expected value of the outcome of a consumer choice is termed ‘utility’. Utility is also known as ‘consumer satisfaction’, and is considered as an amalgam of a wide range of the consumer’s attitudes with respect to the results of the choice. Its dimensions include the extent to which the choice is perceived to meet a particular need, and may extend to such nebulous concepts as the pleasure or enjoyment derived from the outcome of the choice.
Another concept that should be noted in consumer behavior is that consumers tend to realize declining amounts of additional value in acquiring successive additional units of most goods or services. This phenomenon is known as the “principle of diminishing marginal utility”. However, on the opposite, consumer realizes increasing marginal utility when consuming successive units of goods that are objects of addiction.
Consumer Behavior in Organic Foods
Stated that one of the main factors behind the very positive growth expectations in organic foods is a strong and increasing consumer awareness of health and environmental issues, including a growing resistance amongst consumers towards food products made with genetically modified organisms (GMOs) and GM farming.
Dimitri and Greene (2002) found the following findings on several researches on organic food consumer behavior: price, size and packaging, whether the item is on sale, and whether the item is organic; age, gender, and having a college degree had little impact on a shopper’s decision to buy organic produce; consumers with higher incomes and higher levels of education are willing to pay more for organic potatoes; and consumers with advanced degrees are less likely to buy organic produce.
In the study of Batte, Beaverson and Hooker (2003), consumer respondents were asked why they prefer organic foods. The respondents (51%) replied that nutrition was their primary motive. The next most prevalent reason is the desire for pesticide-free food, a desire to support environmentally-friendly agriculture, and finally a suggestion that organic foods taste better. However, in terms of consumers’ willingness to pay for organic products, the results were not conclusive. Although most respondents are willing to pay for a pesticide-free food, other results contradict with each other, showing the need for further research on the phenomenon.
Benbrook (2003) on the other hand stated that food safety will continue to drive the demand for organic foods, based on research, purchasing organic food is a reliable way to markedly reduce exposure to pesticides. Less exposure means greater margins of safety.
CONCLUSION: METHODS AND SIGNIFICANCE FOR FUTURE STUDIES
As examined from the literatures presented above, there is still a need to further explore the expected value and utility of consumers toward organic foods. This research will help organic food companies formulate a managerial economics strategy for their products, specifically in the theories of consumer behavior and demand. Future research can either be quantitative or qualitative. However, quantitative research may be more advisable as it can cover a larger population. It also provides a generalized statistics results. Food consumers in the supermarket can be interviewed to determine their expected values and utilities on organic products. Basic managerial economics computations can be conducted, as well as statistical computations to determine the percentage for each statement or variable. The results in this proposed study may help organic firm managers in their decision making, specifically on the total production quantity targets of their products, or how they will approach the consumers through marketing or advertising.