Transcript AGEC 340 Lecture Slides - Purdue Agricultural Economics

AGEC 340: International Economic Development
Course slides for week 3 (Jan. 26 & 28)
Consumption Patterns*
What explains differences and changes in
consumption during economic development?
* If you’re following the textbook, this material is in Chapter 3.
Week 3.
Determinants of Consumption
• What drives changes in consumption choices?
– food consumption drives nutrition and health;
– many other purchases also help drive development
• From an econ. point of view, we look separately at:
– price effects (“this product is too expensive”)
 demand curves
 price elasticity of demand
– income effects (“my income is too low”)
 income-consumption (Engel) curves
 income elasticity of demand
…and then consider lots of other factors as well!
The Demand Function
Lots of factors could influence quantities consumed;
mathematically, for any one good (Q1):
Q1 = f (...)
What should be in the function?
For example, for the quantity of wheat…
Qwheat = f (...)
How about for the quantity of pork?
Qpork = f (...)
…or potatoes?
Qpotatoes = f (...)
What does actual consumption look like?
(click through to
source websites)
Luxembourg: The Kuttan-Kasses of Erpeldange
Food expenditure for one week: 347.64 Euros or $465.84
USA: The Revis family of North Carolina
Food expenditure for one week: $341.98
Japan: The Ukita family of Kodaira City
Food expenditure for one week: 37,699 Yen or $317.25
UK: The Bainton family of Cllingbourne Ducis
Food expenditure for one week: 155.54 British Pounds or $253.15
United States: The Fernandezes of Texas
Food expenditure for one week: $242.48
Kuwait: The Al Haggan family of Kuwait City
Food expenditure for one week: 63.63 dinar or $221.45
Mexico: The Casales family of Cuernavaca
Food expenditure for one week: 1,862.78 Mexican Pesos or $189.09
China: The Dong family of Beijing
Food expenditure for one week: 1,233.76 Yuan or $155.06
Poland: The Sobczynscy family of Konstancin
Food expenditure for one week: 582.48 Zlotys or $151.27
Guatemala: The Mendozas of Todos Santos
Food expenditure for one week: 573 Quetzales or $75.70
Egypt: The Ahmed family of Cairo
Food expenditure for one week: 387.85 Egyptian Pounds or $68.53
Mongolia: The Batsuuri family of Ulaanbaatar
Food expenditure for one week: 41,985.85 togrogs or $40.02
India: The Patkars of Ujjain
Food expenditure for one week: 1,636.25 rupees or $39.27
Ecuador: The Ayme family of Tingo
Food expenditure for one week: $31.55
Mali: The Natomos of Kouakourou
Food expenditure for one week: 17,670 francs or $26.39
Bhutan: The Namgay family of Shingkhey
Food expenditure for one week: 224.93 ngultrum or $5.03
Chad: The Aboubakar family of Breidjing Camp
Food expenditure for one week: 685 CFA Francs or $1.23
Now back to economics…
What explains differences and changes in
consumption during economic development?
Week 3.
Determinants of Consumption
• What drives changes in consumption choices?
– food consumption drives nutrition and health;
– many other purchases also help drive development
• From an econ. point of view, we look separately at:
– price effects (“this product is too expensive”)
 demand curves
 price elasticity of demand
– income effects (“my income is too low”)
 income-consumption (Engel) curves
 income elasticity of demand
…and then consider lots of other factors as well!
The Demand Function
Lots of factors could influence quantities consumed;
mathematically, for any one good (Q1):
Q1 = f (...)
What should be in the function?
For example, for the quantity of wheat…
Qwheat = f (...)
How about for the quantity of pork?
Qpork = f (...)
…or potatoes?
Qpotatoes = f (...)
The Demand Function
• To make comparisons, we need to express this
mathematically, in terms of specific variables:
Qwheat = f (Pwheat , other prices, income, tastes & tech.)
• To show the demand function in two dimensions,
we must fix the level of all the other variables
• For example:
hold constant
Qwheat = f (Pwheat , other prices, income, tastes & tech.)
or
Qwheat = f (Pwheat, other prices, income, tastes & tech.)
hold constant
Holding all else constant,
we can draw lines on a graph…
We will look at the two kinds of lines separately.
First, demand curves:
Qwheat= f (Pwheat, other prices, income, tastes & tech.)
on horiz. axis
on vertical axis
Then, income-consumption (“Engel”) curves
Qwheat = f (Pwheat, other prices, income, tastes & tech.)
on vert. axis
on horizontal axis
Our textbook picture: two demand curves
price change
is shown by
movement
along the
curve
income changes shift the curve
How can we measure these curves?
Can we make comparisons that eliminate units?
slope = rise / run
≈ 100 / -500
= -0.2
units are $/ton per mt/yr
elasticity = %∆Q / %∆P
= (∆Q/Q) / (∆P/P)
≈ 500/2500 / -100/50
= .2 /-2
= -0.1
= 10%
no units, so
we can make
comparisons!
We also need income elasticities of demand
but how big was
this income change?
…let’s say it was
from 250 to 1000 $/yr :
n = %∆Q / %∆I
≈ 1500/500 / 1000/250
= 3
/
4
= 0.75
=75%
again,
no units so
we can make
comparisons!
Demand follows fairly regular laws:
In response to price, note:
--The “law of demand”: demand curves slope down
» price elasticities of demand are negative
» higher prices lead to lower quantity consumed
--Food demand is usually “price-inelastic”
» quantity consumed changes less than price
» higher prices lead to more total expenditure
( E < 0)
( |E| < 1)
In response to income, note:
--Food demand follows “Engel’s Law”: grows slower than income
» income elasticity of demand is often less than one
( n < 1)
» higher income allows a lower share of it spent on food
--Staple food follows “Bennett’s Law”: grows slower than other food
» income elasticities are especially low
( |nstaples| < |nothers| )
Engel’s Law across countries:
Our textbook picture
In terms of quantity consumed as income rises,
“Engel Curves” look like this:
For all food, Engel’s law applies:
the income-consumption curve
gets flatter as income rises
For starchy staples consumed as food,
Bennett’s law applies: the incomeconsumption curve is really flat
(e.g. as rice, porridge, bread etc.)
dead
or dying
people
very lowincome
people
middleincome
people
we are here!
Income per capita
(US$/year)
For Exercise #1, use real-life data
from our textbook…
Describing the past
allows us to forecast the future
From your homework exercise:
population
growth
(p)
+
(
income
growth
(p)
x
income
elasticity
(n)
)
=
demand
growth
(d)
But reality is more complicated!
How has U.S. consumption actually changed
with our income growth?
Estimated total food consumption in the U.S.,1970-2006
(calories per capita, by source)
3,000
2,500
Added Sugars
2,000
Added Fats
1,500
Cereals&Flour
1,000
Fruit&Veg.
Dairy
500
Meat, eggs,
and nuts
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
0
Source: Calculated from the Loss-Adjusted Food Availability estimates of the USDA/Economic
Research Service (www.ers.usda.gov/Data/FoodConsumption). Data last updated March 15, 2008.
In conclusion…
• To explain and predict changes in consumer
demand, we need to consider:
– price effects, using demand curves
as measured by the price elasticity of demand
– income effects, using “Engel” curves
as measured by the income elasticity of demand
– …and then consider many other factors that can
shift these curves over time or across countries.