Chapter 8

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Chapter 8 Purchasing Power Income and the
Price of Food
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I. Purchasing power

• Takes the price of products into account as well
  as a persons income
• Income / price
• 1. 100 / 2.50 40 Big Macs / week

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C. Increase in purchasing power can come from

• 1. Increase in income
• a. 200 / 2.50 80 Big Macs
• 2. Decrease in price
• a. 100 / 1.25 80 Big Macs

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• II. Elasticities
• A. Quantify changes
• 1. Tell how much, and in what direction,
  consumption changes in response to changes in
  price and/or income

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• B. Can use income elasticities to examine how
  changes in income affect diet and nutrition
• 1. If income goes up (down), how much more
  (less) of a particular food will a family
  purchase

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• C. Can use elasticity of demand to find out how
  much an increase in supply will lower the price
  of a product
• 1. Helps government decide which commodities
  to direct research money to

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• III. Price elasticity of demand
• A. Percentage change in quantity demanded
  given a 1 change in the products own price

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• B. Inelastic demand (necessities)
• 1. OPED lt 1
• 2. OPED -0.26 (corn cassava)
• - Price increases by 1 ? consumption decreases
  by 0.26

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• C. Elastic demand (luxuries)
• 1. OPED gt 1
• 2. OPED -1.73 (livestock products)
• - Price falls by 1 ? consumption increases by
  1.73

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• D. Price elasticities get smaller as income
  increases (Table 8.5)
• 1. Beans OPED
• low income (I) -0.82
• low income (II) -0.78
• middle income (III) -0.64
• high income (IV) -0.45
• high income (V) -0.25

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• IV. Income and demand for food
• A. Income substantially influences the demand
  for food by low- income consumers
• 1. Poor people spend a high proportion of
  their income on food

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• B. Bennetts law As income goes up less is spent
  on starchy foods and more is spent on higher
  quality proteins (animal products) p.126

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• V. Income elasticity of demand (IED)
• A. The percentage change in quantity demanded
  that results from a 1 change in income
• 1. IED 0.58 means an increase in per capita
  income of 1 results in an increase in demand
  for food of 0.58

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• B. Income elasticities of demand for food decline
  as income increases (Table 8.2-p.128)
• 1. Eggs IED
• Lowest income group 1.93
• Middle income group 0.63
• Highest income group 0.11

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• C. Income elasticities vary by commodity (Table
  8.3-p.129)
• 1. Cassava 3.5
• 2. Rice 1.99
• 3. Milk 2.27

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D. Types of Goods

• Normal Good
• a. Income elasticity between 0 and 1.
• b. Income goes up by 1, demand for the good goes
  up, but by less than 1.

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• 2. Luxury good
• a. Income elasticity greater than 1 (elastic)
• b. Income goes up 1 ? demand for the good
  goes up by more than 1 (IED for poultry in
  Indonesia 1.5)

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• 3. Inferior good
• a. Income elasticity lt 0 (negative)
• b. Income goes up 1 ? demand for the good
  goes down
• (IED for roots and tubers in central Africa
  -0.21)

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VI. Elasticities policy

• A. If know elasticity, can calculate how much
  price will fall with increase in supply

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• 1. OPED ? Q / ? P
• 2. -0.19 1 / ? P
• 3. ? P -5.26
• 4. For 1 increase in production, price will fall
  by 5

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• B. Policymakers can use these calculations to
  determine the nutritional effects of increasing
  production of certain foods

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• 1. Want to improve nutrition of poorest groups
• a. Try to increase supply of those commodities
  that have inelastic demand (necessities) for
  low- income groups (Table 8.5-p.132 8.6- p.134)

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C. Policy implications

• Increase the incomes of the poor
• a. Greater IED for food ? increase in their
  incomes will result in greater nutritional gains

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• 2. Promote increases in production of foods with
  inelastic OPED
• a. These are the necessities that the poor spend
  most of their food budget on
• b. Price will fall more with increase of supply
  of these foods

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• D. A policy dilemma
• 1. Increase in supply of food with inelastic
  OPED results in decrease in total revenue
  received by farmers
• (TR P Q)

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• a. Price falls by 1 - quantity sold goes up
  by lt 1 ? decrease in total revenue
• b. Increase in Q does not make up for drop in P

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• 2. Increase in supply of food with elastic OPED
  results in increase in total revenue received by
  farmers
• a. Price falls by 1 - quantity sold goes up
  by gt 1 ? increase in total revenue
• b. Drop in P is more than offset by increase
  in Q

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• 3. Policy that helps low-income consumers hurts
  the income of farmers

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• E. Policy dilemma 2
• 1. Increase in income increases demand for food
• 2. Increase in demand causes food prices to rise
  decreasing purchasing power
• 3. Demand increases must be met by supply
  increases