Fair Trade: Impact on Global Poverty and Consumer Behavior

Posted on Jan 15, 2025 in Economy

Fair Trade: Impact on Global Poverty

Fair trade: The way in which Western countries trade with poorer nations affects their standard of living and, in many cases, keeps people in poverty. If we changed the rules of trade to be fair, we could improve the lives of millions of people.

Fair Trade is an organized social movement and a market-based approach to helping producers in developing countries earn a fair amount of money for their work. It also tries to support sustainability.

Fair Trade History and Popular Products

  • Fair trade was established in 1988.
  • The most popular fair-trade products are chocolate and coffee.

Challenges in Global Farming

Farming in other nations like Indonesia, Ecuador, and Cameroon has led to child trafficking, conflict financing, and awful working conditions.

Women often face:

  • Low-paying jobs (lower wages than men)
  • Harassment
  • Lack of property rights
  • Lack of access to credit

Fair Trade works to ensure that food producers are being paid a stable wage for their labor.

Fair Trade Products and Their Impact

Fair trade products are often more expensive.

Fair trade helps developing nations sell their products to developed nations, which will pay higher prices for them. This aims to:

  • Improve working conditions
  • Raise wages
  • End child labor
  • Move individuals and communities out of poverty
  • Limit environmental damage

Companies Offering Fair Trade Products

Companies like Starbucks, Walmart, and McDonald’s offer fair trade products.

Fair Trade Certification and its Limitations

A product made with as little as 20 percent (in the USA, it is 10%) Fair Trade ingredients may nevertheless be labeled as an ethically produced item.

Sellers fear that small coffee farmers will lose market share to the big plantations, and companies will include only the minimum amount of fair-trade ingredients in products. Therefore, they implemented a new policy, which was one for 100% fair trade and the other.

All these products increased their sales due to fair trade.

Theory of Demand and Consumer Behavior

The theory of demand is to determine factors affecting demand:

  • Price of commodity
  • Other prices
  • Income
  • Tastes
  • Income distribution
  • Total population
  • Wealth
  • Government policy

Key Aspects of Demand Theory

  • The theory emphasizes the customer’s demand for durable and non-durable goods.
  • It doesn’t deal with investment goods.
  • It is only a fraction of the total demand in the economy as a whole.
  • Market demand is assumed to be the summation of the demands of individual consumers.
  • If a consumer gets more utilities from a commodity, he would be willing to pay a higher price and vice-versa.

Nature of Consumer Behavior

  • Leads to purchase decisions
  • Varies from product to product
  • Improves the standard of living
  • Reflects the status of the consumer

Understanding Utility in Economics

Utility: The power of a commodity to satisfy, which varies from person to person. The concept of utility is ethically neutral, as both harmful and useful things are considered. The value in use of a commodity is the satisfaction we get from its consumption.

Marginal Utility: The additional utility derived from an additional unit of a commodity. It refers to the net addition made to the total utility by the consumption of an extra unit of a commodity.

Total Utility: The sum of utility derived from different units of a commodity consumed by a consumer. It is the amount of utility derived from the consumption of all units of a commodity that are at the disposal of the consumer.

Marginal Utility Analysis: A theory that seeks to explain how a consumer spends his income on different goods and services to attain maximum satisfaction.

Assumptions of Utility Analysis

  • Utility is based on the cardinal concept.
  • Utility is measurable and additive of goods.
  • The marginal utility of money is assumed to be constant.
  • The hypothesis of independent utility.
  • The consumer is rational.
  • There are no substitutes.
  • Utilities are not influenced by variations in prices.
  • The theory ignores complementarity between goods.

Law of Diminishing Marginal Utility

  • The law of marginal utility is based on human wants. The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has.

Assumptions

  • Tastes and preferences of the consumer remain constant.
  • The income of the customer also remains constant.
  • Units of goods are identical or similar.
  • The process of consumption is continuous.
  • Units of goods are not very small in size.

Importance

  • Farming taxation policy by the government
  • Useful to the consumer to regulate expenditure
  • Useful to the monopolist producer in fixing the prices of his products
  • Basic for the law of demand

Explanation of the Law

  • Suppose a person consumes the first apple; he derives the highest level of utility, and the intensity of his desire declines. If he consumes a second apple, he gets lesser satisfaction than the first apple. The utility that he gets from the third apple will be still less. If he continues to consume more and more apples, the utility from each apple goes on diminishing as the intensity of his desire goes on diminishing. It tells us we obtain less and less marginal utility from the successive units of a commodity as we consume more and more of it.

Ordinal and Cardinal Approaches to Utility

Ordinal Approach: The ordinalist school postulated that utility isn’t a measurement but is an ordinal magnitude. A consumer need not know in specific units the utility of various commodities to make a choice.

  • It is needed for him to rank various commodities. He must be able to determine his order of preference among the different bundles of goods. Example: We prefer Mercedes to Nissan, but we don’t say by how much.

Cardinal Approach: The cardinalist school postulated that utility can be measured. Various suggestions have been made for the measurement of utility.

  • With full knowledge about market conditions and income levels, some economists have suggested that utility can be measured by monetary units, utils, by the amount of money a consumer is willing to sacrifice for another unit of a commodity. Example: If a Nissan car gives 5,000 units of utility, a Mercedes car would give 10,000 units.

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Understanding the Budget Line

  • A higher indifference curve shows a higher level of satisfaction than a lower one.
  • A consumer, in his attempt to maximize satisfaction, will try to reach the highest possible indifference curve.
  • In pursuit of buying more and more goods, he will obtain more and more satisfaction. This includes two constraints:
  • He has to pay prices for goods.
  • He has a limited money income with which to purchase goods.
  • The budget line shows all those combinations of two goods.
  • A consumer can buy by spending his given money income at their given prices.
  • Those combinations which are within reach of the consumer will lie on the budget line.
  • The power of the consumer from which he can purchase certain quantitative bundles of two goods at a given price.

Key Points of the Budget Line

  • It separates what is affordable from what isn’t.
  • It slopes downwards, as more of one good can be bought by decreasing some units of the other good.
  • Bundles that cost exactly equal to the consumer’s money income lie on the budget line.
  • Bundles that cost less than the consumer’s money income show under-spending. They lie inside the budget line.
  • Bundles that cost more than the consumer’s money income aren’t available to the consumer. They lie outside the budget line.