South-Westerns' Economic News Summaries
Is Wal-Mart good for you?
Subject Impact of Wal-Mart on retail trade in U.S.
Topic Utility and Consumer Choice, Product Markets
Key Words

Wal-Mart, sales, employment, price.

News Story

Wal-Mart had over $312 billion in revenues last year, employs 1.3 million workers in the US alone, and has 3,800 stores in the US. So is the company doing the U.S. any good?

In terms of employment, Wal-Mart sort of helps the U.S. economy. A typical Wal-Mart employs about 200 people; a Wal-Mart "Supercenter" employs twice that. Research indicates that every additional 100,000 store square feet creates 97 retail jobs, and eliminates 30 wholesale jobs. But remember: This is correlation, not causation; it may simply be that Wal-Mart chooses to locate in areas that have strong retail growth potential.

In terms of wages, Wal-Mart doesn't really help Americans. A retails worker's average income was about $13,860 in a particular study, which also found that the presence of a Wal-Mart reduced wages by only 1%. This could be because of reduced hours, displacement of better-paying jobs by low-wage jobs, reduced wages, or some combination of all three.

In terms of consumer utility, Wal-Mart absolutely does contribute to the U.S. economy. Wal-Mart tends to increase consumer choice, consumers respond. Between 1998 and 2001, one study found that household spending on groceries at Wal-Mart Supercenters increased from 11% to 16%. Some estimates estimate that the average U.S. household saves $450 by shopping at "big-box retailers" like Wal-Mart. In fact, studies document that consumer prices actually fell before Wal-Mart opened in some areas, as a means of pre-empting Wal-Mart's entrance into those areas, or to attract customer loyalty before customers saw Wal-Mart's price reductions.

Though many people are ambivalent about Wal-Mart's effects on "mom and pop" stores and other businesses, the chain clearly delivers consumers significant benefits. The company's effects on the producer side are not as clear. That explains why consumers love Wal-Mart, and producers love to hate it.

Questions
1.

What impact does increased consumer choice have on utility? Why?

2. What impact do reduced prices of all goods by, say, 5%, have on a consumer's budget line?
3. When Wal-Mart comes to town, how does the distribution of consumer and producer surplus change? Why?
Source "Measuring the Wal-Mart effect." The Economist 25 February 2006. http://www.economist.com
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