A sudden realization of a global food crisis among the public, or rather, prices increase of rice, has prompted several questions relating to supply chain and economics. One interesting economic question that I was requested to answer was why prices of fresh produce are not treading the path of rice prices?
To be honest, I have not seen the relevant data for fresh product — which by the way generally means vegetable — but the increase in rice prices is painted all over the news. But if we take the implicit assumptions of the question as true, why indeed do we not see the same pattern that dominates the rice market in the fresh produce market?
When I read the question, price effect, elasticity of demand and the Engel’s Law came to mind.
The Engel’s Law is an economic observation first expressed by statistician Ernst Engel[1] in the 19th century which states that a proportion of income dedicated to food, mostly starches, is larger the poorer a person is. I believe the Engel’s Law does answer the question to some extent.
Allow me to explain. Take a deep breath too.
An individual has some amount of income and a fraction of that income is dedicated to food. That fraction is further distribution among various kinds of food and we shall make a simple model which consists of staple food and luxury foodstuffs. We assume expenditure on other items as constant. Or, to make it easier, let us assume that we live to eat.
When price of staple food goes up, the person will have less purchasing power; that means he could buy less staple food for the same amount of money compared to before the price increase. If he wants to consume the same amount of luxury foodstuff, he will have to cut his consumption of staple food. The issue here is that it is staple food and staple food translates into low elasticity of demand. In simple English, changes in price do not affect quantity demanded by too much.
Therefore, cutting back on staple food consumption may not be the most preferred option. Thus, he cuts back on luxury foodstuffs while trying to maintain his current rice consumption level. As a result, demand for rice stays put, or falls only slightly while demand for other foodstuff falls dramatically.
This predicts a fall in prices for fresh produce demand while rice prices would stay constant, if everything else is the same.
With the background of increasing population size across the world, demand in general may be on the rise, causing a general upward pressure on prices of all goods. It has to be noted that a majority of those in a society is mostly made up of lower and middle class individuals and this is the relevance of Engel’s Law. What this explanation may lead to is this: while prices for both goods may increase, rice prices grow faster than luxury foodstuffs by virtue of constant demand for rice of an individual and decreased demand for luxury foodstuff of an individual with increasing population size.
Finally, a possible anomaly happening at the demand curve: the curve is most likely to be a vertical line perpendicular to the quantity axis or something close to that. I wish I had Matlab or something with me. I would love to run a model with the associated indifference curves.
[1] — Gregory Clark in Chapter 3, of his famed A Farewell to Alms insists that the statistician Engel is “not to be confused with his rabble-rousing contemporary Friedrich Engels”. Yes communists worldwide, Mr. Clark took a cheap shot at you.
