Intermediate Microeconomics

micro demo "SOME" of the topics

Appendix a shows a Reuters article describing a congressional committee prioritizing spending cuts to food stamp and other "SNAP" benefits to some 43 million low-income Americans over the next ten years (Stephenson, n.p.) This is a projected, nominal amount as yet since we don't know future inflation, but modeling such a cut demonstrates microeconomic tradeoffs that will reverberate throughout the economy. Furthermore, this analysis will pretend that figure is in adjusted 2009 dollars, which is not terribly drastic if inflation growth stays low. Why? That assumption allows for comparison with most recent U.S. Bureau of Labor Consumer Expenditure Survey data to consider the effects of reduced purchasing power from SNAP cuts.

The 2010 Consumer Expenditure Survey Table 2 (Appendix B, U.S. Bureau of Labor Statistics, 2011, n.p.) provides real data useful for modeling some of the effects of cutting SNAP benefits. Consider the $10,00-14,999 per year income bracket, the large majority of whom are white and female, and either over 55 years old, or some of whom are very old and young, but more of whom than not have at least one dependent and also less than one full time earner per "consumer unit" (U.S. Bureau of Labor Statistics). More importantly, this group is budget-constrained, as indicated by average annual spending greater than income, and negative asset growth / positive liability growth. These consumers are living on some form of credit in addition to SNAP, this suggests. Therefore they would face immediate tradeoffs from a cut to SNAP.

Consumer Expenditure Survey (CES) Table 2 (U.S. Bureau of Labor Statistics) shows, improbably enough, these consumers spent exactly the same mean amount per year on vegetables as they did on alcoholic beverages, which is fortuitous because this demonstrates perfect substitution at first if both goods are discretionary, but then also an increase in cost with only one good plausibly considered discretionary, alcohol, using the same graphs for space. If these were the only two goods available, and the consumer spent more on food than their SNAP income as is the case here, the result is that some food is purchased with cash and so a reduction in SNAP would mean a direct reduction in total purchasing power. Therefore if they are living at baseline subsistence, and if vegetables (rice, potatoes) are the cheapest food and therefore lack viable substitutes outside this model, and if consuming less vegetables means starvation, then the only place in this model any money can come from to replace SNAP cuts would be reduced alcohol consumption. Given more space this is usually demonstrated on separate graphs but we may be able to pull it off and still discuss other effects farther down the line.

Figure I (Appendix C) shows budget line 1, the real tradeoff between vegetables and alcohol that existed for this group in 2010. Had they surplus income, i.e. were there cheaper, adequate food besides vegetables, and veggies and alcohol were perfect substitutes, there would theoretically be an infinite number of indifference curves with whatever personal marginal rates of substitution for each individual on their budget line like the two labeled a and B. But say there was no food cheaper than vegetables and SNAP benefits were cut where consumption was more than income, then there would be less purchasing power for alcohol, which in this model would simulate a price increase (external to these graphs); units of alcohol consumed would fall as budget shifted to budget line 2 in Figure 2, inelasticity of Y to X would increase at lower values of Y (Appendix C Table a displays some of the infinite elasticities located on both curves), and the program would very likely accomplish the stated objective of cutting out some discretionary spending, which in this case may also carry externalities in public health. The consumer's indifference curve would be on a lower budget line against their preference but this would have effects of its own beyond individual consumers (below). On the other hand if we shifted the good on the X axis to "rent" and called that at its possible minimum to begin with (i.e. without substitute outside the model), then a cut in SNAP that decreased purchasing power for both goods would equal an absolute reduction of all consumption as demonstrated in figure 4, and both "corner solutions" of all one and zero of the other would change instead of remaining the same at X=0 for vegetables in Figure 2. Were these goods perfect complements, the indifference curves would in fact be fully squared instead of rough isoquants displayed here.