Elasticity of demand for food

The US Dept of Food produces an interesting service on offering estimated elasticities of demand. [link]

This graph shows the Cross Elasticity of demand (XED) for various goods with respect to food.

cross-elasticity-of-demand

I choose two countries – Bangladesh (low income) and the UK (relatively high income)

Source: [link]

What this means is that if the price of food rises 10%, then in the UK, demand for education falls by about 0.05%.

However, Bangladesh has a Cross Elasticity of demand of 0.32. Therefore a 10% rise in food prices would cause a 3.2% fall in demand for education

The highest cross elasticity of demand is for recreation. Recreation is what we would call a luxury good. If income falls, we can lose spending on recreation because it is not essential.

It shows that – for a poor country like Bangladesh – if food prices go up, it means a significant fall in spending on recreation. Demand in the UK remains mostly unchanged.

It’s a good example of how rising food prices will have different effects in alternative countries. When food prices rise in the UK, it is an inconvenience. When food prices rise in developing countries, it makes families rearrange their whole budget.

Income Elasticity of Demand

income-elasticity-yed

As expected Bangladesh has a higher income elasticity of demand for food. For example, for dairy products, there is an income elasticity of demand of 0.89. For the UK it is 0.375. For the US it is 0.11

Price Elasticity of Demand

price-elasticity-demand-formula

Update to What explains the volatile price of food? According to US Dept of Food, the price elasticity of demand for bread and cereals at 0.04 — that is, it would take a 25 percent rise in price to induce a 1 percent fall in consumption.

ped-arc-inelastic-demand

A change in price leads to a smaller percentage fall in demand.

Demand for food is inelastic because

  • Small percentage of income
  • No alternative to food
  • A necessity

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