Despite the bumper production of Aman rice in November-December 2019, the retail rice price has increased in January-February, 2020. According to Trading Corporation of Bangladesh (TCB), the average retail price of fine rice in Dhaka city was within the range of Tk 54 to Tk 60 in the first week of February, about Tk 4.0 increase compared to the price of the first week of January 2020. The prices of medium and coarse rice have also increased by Tk 6.0 and Tk 2.0 to Tk 3.0 per kg, respectively, during the same time. The average price of medium rice was Tk 42 to Tk 54 and the coarse rice price was Tk 32 to Tk 35.
The longstanding and ongoing questions are what does the increase in rice price mean to consumers, how they get affected by this or how they adjust their consumption patterns? Without loss of generality, it can be said that the increase, irrespective of income level, affects every consumer (disregarding rice producer) of rice. Nobody wants to pay more if there are cheaper options.
The analysis below addresses all these issues. The main objective of this short article is to examine the consumption patterns of urban consumers and the adjustment of consumption with an increase in rice price. To this end, the analysis utilises Household Income and Expenditure Survey (HIES) 2016 data and the microeconomics of consumer demand. The analysis focuses on the urban consumers of Dhaka city because they are all rice buyers and are therefore likely to face the big impact of rice price increase.
The analysis starts with describing the consumption patterns of Dhaka city consumers. Table 1 shows the monthly per capita consumption of different food items. To capture the heterogeneity of consumption across households' economic conditions, this analysis divide all-urban Dhaka sampled households into ten groups (decile) based on per capita consumption expenditure. The results show that, on average, of the total food expenditure, the urban people of Dhaka spend the highest on fish (Tk 445.5) consumption followed by rice (Tk 388.7) and meat (Tk 314.6). These mean urban households spend 18.2 per cent, 15.8 per cent and 12.8 per cent of their food budget on fish, rice, and meat, respectively. This also implies rice is still the staple food and one of the top sources of calories. The poor households, who mainly belong to lower than third expenditure decile group, have lower per capita food consumption than richer households. Except for rice, the monthly per capita consumption expenditure on food increases as we move up the ladder of expenditure decile. The monthly per capita rice consumption increases up to the sixth decile group, then it starts to decrease. The richest group (tenth decile) has lower per capita rice consumption than the third, fifth, and sixth decile groups. The poorest (first decile) spends 31 per cent of the food budget on rice whereas the richest spends 11.4 per cent. This implies that the lower-income households will be worst hit from a rice price hike than the richer households will. Does this mean the poorer will reduce the rice consumption by consuming the substitute good of rice or they will lower the consumption of other goods? To explain this, we will first go over a few basics of consumer demand and then looking at the data, the analysis provides an explanation.
Following the economic theory, the overall effect of a change in the price of rice can be broken down into two components - a substitution effect and an income effect. When the price of rice increases, then the consumer will substitute cheaper food - which is known as the substitution effect. A rise in price decreases the consumer's purchasing power (i.e., the consumer can no longer afford to buy the same basket of goods). This change in purchasing power is termed the income effect because it affects the consumer in much the same way as a change in income would. Because of the substitution effect, for all types of goods, the change in quantity demanded goes in the opposite direction as the way price changes. If the quantity demanded always changes in the same way as income changes, then the good is called normal good. If the quantity demanded changes in the opposite direction as income changes, then the good is called an inferior good.
Now, looking at the total rice consumption (grams) as shown in table 2, we see if the increase of rice price reduces the purchasing power or real expenditure (income), then some consumers respond by increasing the consumption of rice. For example, if real expenditure (income) reduces from the tenth decile to ninth decile, then per capita per day quantity of rice consumption increases by about 27 grams (column 1 in table 2). Does this mean rice consumption increases when real income decreases from an increase in price? The quantity consumption of rice in terms of quality of rice as shown in table 2 explains this. The results in table 2 show that when people's purchasing power reduces from an increase in price, then the people of Dhaka city sacrifice the high quality of rice for medium or lower quality of rice. The relatively higher group of expenditure decile switches to medium rice from fine rice and the middle or lower group switches to coarse rice. The substitution occurs across the quality of rice. In this way, all income groups address their real income loss-the middle-income group keep their total consumption of rice unchanged or consume more rice whereas the poorer only slightly reduces consumption. The responses of household consumption to rice price increases will be misleading if we do not take into account the substitution between the qualities of rice.
Note: The chart is drawn based on the rice consumption patterns of Urban Dhaka households estimated using Household Income Expenditure Survey (HIES) 2016.
In summary, the analysis shows that the people of urban Dhaka city switch to the consumption of more fish and meat with an increase in income. Poor people spend the largest share of the food budget on rice. For some range of expenditure (income), rice is normal good (between points A and B in chart 1), then after sixth expenditure decile, the rice turns out to be an inferior good (between points B and C) because rice consumption declines with an increase in expenditure. The consumer reduces the consumption of fine rice and increases the consumption of medium or coarse rice when rice price increases. This means households in urban Dhaka largely protect access to quantity consumption of rice by downgrading the quality of rice when they face rice price increases.
Dr. Zabid Iqbal is a Research Fellow of Bangladesh Institute of Development Studies (BIDS), Bangladesh and is a Postdoctoral Research Fellow at the University of British Columbia (UBC), Canada
Opinions expressed in this article are those of the author; they do not necessarily reflect BIDS and/or UBC policies.