Anyone who has taken any sort of micro-economics course knows the law of demand: namely that people buy less of something as the price of the good increases. This so called downward sloping demand curve is fundamental in economics. You may have also heard of the existence of a Giffen Good – a good that if its price is increased you may actually purchase more of it. The problem is that they have never been found in the real world, until now. Jensen and Miller in the latest issue of the AER document giffen behavior with respect to the purchase of both rice and wheat in rural China.

While this kind of a paper really excites economists, especially the authors as they will forever be cited in every discussion of consumer behavior, it also has a number of really important implications for the real world. The authors argue that this type of behavior could be widespread throughout the developing world, and this could have big implications as we continue to address poverty and rising food prices around the world.

The basic argument put forward to explain this type of behavior is that since rice or other staples occupy such a large share of the total expenditures of poor households, if the price of these good rises, then they will need to cut back their expenditures on more expensive sources of nutrition, but since they still need as many calories and that rice is still cheaper than other alternatives, they end up purchasing more of rice than they did before.

This paper provides a lot of insight into the behavior of poor households. As incomes rises, consumers will try to substitute away from more nutritious foods to those that perhaps provide more utility by virtue of tasting a lot better. Therefore, as the authors conclude, nutritional support programs “…are unlikely to significantly improve nutrition among subsistence households unless they effectively move them out of the subsistence zone, since within this zone households will spend additional income on improving the taste of their meals, rather than their nutritional content.”.

Poor households in China can be foodies too.

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1 Response » to “Upwards sloping demand curves and rising food prices”

  1. Jack says:

    Can you link to the paper/abstract? Thanks

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