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Chapter 8 – Purchasing Power: Income and the Price of Food

Chapter 8 – Purchasing Power: Income and the Price of Food. I. Purchasing power. Takes the price of products into account as well as a person’s income Income / price 1. $100 / $2.50 = 40 Big Macs / week. C. Increase in purchasing power can come from:. 1. Increase in income

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Chapter 8 – Purchasing Power: Income and the Price of Food

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  1. Chapter 8 – Purchasing Power: Income and the Price of Food

  2. I. Purchasing power • Takes the price of products into account as well as a person’s income • Income / price 1. $100 / $2.50 = 40 Big Macs / week

  3. 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

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

  5. 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

  6. 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

  7. III. Price elasticity of demand A. Percentage change in quantity demanded given a 1% change in the product’s own price

  8. B. Inelastic demand (necessities) 1. OPED < 1 2. OPED = -0.26 (corn & cassava) - Price increases by 1%  consumption decreases by 0.26%

  9. C. Elastic demand (luxuries) 1. OPED > 1 2. OPED = -1.73 (livestock products) - Price falls by 1%  consumption increases by 1.73%

  10. 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

  11. 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

  12. B. Bennett’s law: As income goes up less is spent on starchy foods and more is spent on higher quality proteins (animal products) p.126

  13. 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%

  14. 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

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

  16. 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%.

  17. 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)

  18. 3. Inferior good a. Income elasticity < 0 (negative) b. Income goes up 1%  demand for the good goes down (IED for roots and tubers in central Africa = -0.21)

  19. VI. Elasticities & policy A. If know elasticity, can calculate how much price will fall with increase in supply

  20. 1. OPED = %  Q / %  P 2. -0.19 = 1 / %  P 3. %  P = -5.26 4. For 1% increase in production, price will fall by 5%

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

  22. 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)

  23. C. Policy implications • Increase the incomes of the poor a. Greater IED for food  increase in their incomes will result in greater nutritional gains

  24. 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

  25. 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)

  26. a. Price falls by 1% - quantity sold goes up by < 1%  decrease in total revenue b. Increase in Q does not make up for drop in P

  27. 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 > 1%  increase in total revenue b. Drop in P is more than offset by increase in Q

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

  29. 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

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