Download 11 Markets and consumer demand

MIFIRA Framework
Lecture 11
Markets and consumer demand
Chris Barrett and Erin Lentz
February 2012
Households and Consumption: Analysis
of Demand
• Household consumption choices
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Access: How do households interact with markets?
Preferences: Which transfer(s) do households prefer?
Terms of trade (ToT)
Elasticities
Marginal propensities to consume (MPC)
Commodities: Which commodities to analyze?
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Q1. Are local markets functioning well?
• 1a. Are food insecure households well connected to local
markets?
• 1b. How will local demand respond to transfers?
• 1e. Do food insecure households have a preference over the
form/mix of aid they receive?
• 2b. Will agency purchases drive up food prices excessively
in source markets?
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Access
• Basic info: which markets, for what products,
when?
• What constrains access?
– Community-level market access and inter-community
constraints
• Distance, safety, costs, seasons
– Intra-community constraints
• Socio-cultural reasons (gender, caste, marital status, etc.),
safety, OVCs, HIV+ households
• When are access constraints insurmountable?
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Community-level access questions
• What types of markets can community members
access?
– Are any markets currently inaccessible?
– Does this vary with seasons?
• How far away are the markets?
– Can households travel to a larger market if local
market prices increase too much?
• Are there key products not locally produced
unavailable in the market?
– Does this appear to be due to commercial supply
disruptions, government trade bans, high prices,
insufficient local demand, or some other reason?
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Intra-community market access
questions
• Does everyone within a community have equal
access to local markets?
– How does market access differ for likely targeted
recipients?
– How do households with limited access cope?
– Which household members use markets?
– Do households use cash, credit, or barter?
• What staples and substitutes do target
populations buy from local markets?
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Methods of understanding access
• Information sources:
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Expenditure data
Rapid Appraisal
Key Informants
Household survey
Focus group discussions
• by gender
• by target population
– Optimal ignorance, i.e., the fine art of asking questions
• Innovative delivery mechanisms may alleviate
identified constraints
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Preferences
• Eliciting preferences can identify not only
preferred transfer but also issues and concerns
of households or individuals
• When eliciting preferences, need to provide
information on how transfers would most likely
be delivered
• Will delivery location and timing for different transfers
differ?
• Will cash transfers be inflation indexed?
• What shapes preferences?
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Preferences
• Preferences across households may vary
– Income levels and sources, labor availability,
frequency of market access…
• Preferences within households may vary
– Gender, age, resource control, labor availability…
• Preferences drive elasticities
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Eliciting preferences
• Preferences can be sensitive: who is asked and
where can shape findings
Source: Lentz (2009)
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Income and Food Consumption
• Engel’s Law
– As income increases, the proportion of the budget
spent on food decreases
– Poor households spend proportionally more on food
than richer households
• Bennett’s Law
– As income increases, the proportion of the budget
spent on ‘starchy-staples’ decreases
• Reflects desire for dietary diversity
• Sharper than Engel’s Law
• Price increases of starchy staples are most
burdensome to poor households
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Measures of Food Consumption
Relative to Household Income Level
(in Log form)
Source: Timmer et al. (1983). p. 57
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Income and Consumption
• Normal goods
– Change in income changes demand for the normal
good in the same direction.
– Income effect and substitution effect work in the
same direction (combining effects)
– When the price of a normal good rises, households
may substitute other goods for it.
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Income and Consumption
• Inferior goods
– Increase in income results in a decrease in demand
– Income effect is in the opposite direction from the
substitution effect (countervailing effects)
– For very poor households, demand for an inferior
good can increase when prices rise (and no
substitutes are available) or when income falls
• Households can no longer afford to buy more expensive
foods and thus spend more on cheaper, lower quality
calorie sources
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Effects of a Food Price Increase
• All else equal, price increases for inferior goods
with few substitutes harm consumers’ welfare
more than equivalent price increases for
substitutable or normal goods
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Income and Substitution Effects due to
a Price Increase
Source: Timmer et al. 1983. P. 44.
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Elasticities
• General formula for elasticities:
eij = (Percentage change in variable i) / (Percentage change in
variable j)
• Own price elasticity
e0wn price = Quantity 1 % change / Price % change in quantity 1
• Income elasticity
ei = % change in demand for variable i / % change in income
• Cross price elasticity
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Elasticity of demand (FEWs, Lesson 1,
p. 22)
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What makes supply or demand elastic?
(FEWs, Lesson 1, p. 24)
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What makes supply or demand elastic?
(FEWs, Lesson 1, p. 24)
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Income and price elasticity for the bread and cereals food
group by per capita GDP
Source: Sited in World Food Programme, (2008) “PDPE Market Analysis Tool: Price and income elasticities” p.6: USDA-ESR
elasticities database, 1996, and GDP data from WDI 2006.
Note: Income and price elasticity estimates for the cereal and bread food groups are extracted from the USDA-ESR database collected
in 1996. GDP/capita values are in constant 2000 USD for the year 2004. These values were extracted from the WDI 2006 database.
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The number of countries for which data was available is 107.
Income elasticities
• Income elasticity of demand
– Another definition of Engels Law: the income
elasticity of demand is less than one.
• Income elasticity of demand is closer to 1 for poorer
households than for richer households
• Income elasticity of demand
• ei = Percentage increase in demand
expenditure / Percentage increase in
income
• generally lies between 0 and 1
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Example: Income Elasticity of Demand: Estimating
increased volume demanded for food due to cash
distribution
Source: Barrett et al. 2009
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Price Elasticities
• A 1% increase in prices changes demand by x%
e0wn price = % change in demand for Good A / % change
in Price of Good A
• Price elasticities are generally below zero but for
poor households and staple products, price
elasticities may be above zero…why?
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Price elasticities
• Use price elasticities to understand the affect of
increasing prices on consumers’ demand
• Also, use price elasticities to estimate the affect
of increased food supply on prices
• Example: food aid increases supply by 1%
– Price elasticity = -0.2 implies food price falls by 5%:
(1%/ x% = -0.2)
– Price elasticity = -0.6 implies food price falls by
1.7%: ( 1% / x%= -0.6)
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Using Elasticities: Inverse Price Elasticity of Demand:
Estimating % Change in Price due to a % Change in
Supply: High Estimate
Price elasticity of demand: Less elastic (closer to zero)
-0.25
Inverse price elasticity of Demand: High estimate
-4.00
Estimate food aid delivery volume (i.e., addition to local supply)
25.00
Estimated market supply pre-delivery
% Supply Expansion due to Food Aid Deliveries
Estimated Percentage change in prices: High estimate
500.00
0.05
-20.00%
Source: Barrett et al. 2009
price elasticity = percent change in supply / percent change in price
x=change in price
-0.25=0.05%/x,
x = -20%
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Using Elasticities: Inverse Price Elasticity of Demand:
Estimating % Change in Price due to a % Change in
Supply: Low Estimate
Price elasticity of demand: More elastic (further from zero)
-0.80
Inverse price elasticity of Demand: Low estimate
-1.25
Estimate food aid delivery volume (i.e., addition to local supply)
25.00
Estimated market supply pre-delivery
% Supply Expansion due to Food Aid Deliveries
Estimated Percentage change in prices: Low estimate
500.00
0.05
-6.25%
Source: Barrett et al. 2009
price elasticity = percent change in supply / percent change in price
-1.25=0.05%/x, x = -6.25%
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Limitations of Elasticities
• Rare to find elasticities for the populations of
interest
– Try to find urban / rural and poor/non-poor
• Rare to find elasticities for the commodities of
interest
– Use sub-group
• Always compute high / low estimates and be
conservative
• Elasticities incorporate substitution effects
between foods, but not other second-round
coping mechanisms
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Marginal Propensity to Consume
• As income increases by an amount, what is the
amount that demand increase?
MPC = Change in consumption / Change in income
• Consider estimating an MPC in the field
– Where income elasticities are unavailable or
unreliable
– Verify estimates
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Computing MPCs in the field
• Ask likely recipient households how they would
spend a one-time gift.
• Using proportional piling, households indicate
what proportion of this gift would be spent on
food (or for key each commodity).
• The denominator is the size of the one-time gift
• The numerator is the value of the gift that would
be spent on a certain commodity.
MPC = Expenditure on good_1/ Value of transfer
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Terms of Trade
• Terms of trade for good i and j is the ratio of
prices for goods i and j.
ToTij = (Price of good i)/(Price of good j)
• Compute for target groups:
ToTwr*= (day wages) / (price of 1 kg of rice)
*Sometime called the “net barter terms of trade”
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Terms of Trade
1. Who are the target groups or livelihood groups
of interest?
2. What is/are the main cash income sources of
these groups, such as the sale of a cash crop,
livestock or daily labour?
3. What is/are the main staple foods consumed by
these groups?
4. Which data is required and/or available?
Source: WFP PDPE
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Terms of Trade: Guinea Bissau
WFP 2008. “PDPE Market Analysis Tool: Terms of Trade” p. 6.
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Terms of Trade: Limitations
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Diverse livelihoods
Diverse consumables
Substitution effects
Dynamic
Local price data may differ from national data
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Commodity Choice
• Choose commodities that are:
– Crucial for food security
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staples
proteins
fats
other foods containing key micronutrients (e.g., iron)
– Consumed by the target population
• Assess whether seasonal consumption patterns differ
– Generally available on the market
• For example, corn-soy blend (CSB) is rarely available in large quantity
on local markets
– Nutritional assessments may suggest particular products
• Fresh fruit and vegetables in refugee camps
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Commodity Choice
• Compute budget shares
– Most concerned about commodities whose price changes are
most likely to most impact the poor
» Focus on budget shares of the targeted populations
– A budget share is the ratio of the amount spent on one
commodity for a given time-period divided by the amount of
(cash and non-cash) budget earned for the same time period
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Commodity Characteristics
• Assess particularly staples and substitutes, but also key
complementary goods and services, such as water,
medicine, fuel, or shelter.
• Is each candidate commodity an inferior or normal
good?
• What are the substitutes for these goods?
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Commodity Choice
• The number of commodities to consider will depend
on:
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Local consumption patterns
Nutritional concerns
Commodity characteristics (e.g., substitutability, dominance in diet)
Timeliness
Cost
• Keep in mind:
– Ask each trader about no more than 2-3 commodities (1-1.5 hours max)
– Commodity choice will inform the length of the supply chain (includes
source and destination markets)
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