Higher commodities prices, especially those of oil and rice, have given us some excellent examples of the cross price elasticity of demand. Apart from the usual boring changes like higher sales of small cars and greater use of public transport, there has been a increase in demand for camels in Rajasthan, while Liberians are eating maize or millet spaghetti.
High oil prices also have had a positive effect on demand for natural rubber. Oil provides the raw material for synthetic rubber, so when the price of oil rises, so does that of synthetic rubber. As synthetic and natural rubber are (not perfect, but to a large extent) substitutes, they have a positive cross price elasticity, so the price of natural rubber rises as well.
There have been other causes of movements in the price of rubber, including the disruption to the production of synthetic rubber caused by the collapse of the Soviet Union (a major producer). A graph of the price of natural rubber over surrounding decade or two shows a very noticeable spike.
The current rise in food prices is also certain to produce many examples of the income effect on demand for inferior goods increases. Rice, as a staple in many countries is likely to show many interesting effects as in some countries has both more expensive (e.g. meat and vegetables) and cheaper (e.g. the cheapest types of bread) substitutes. There may be observable effects on demand for both.
What about the people who consumed the cheaper substitutes for rice prior to the price rises? The answer, tragically, is that they are already simply eating less.
There is also evidence that rice and wheat are Giffen goods in some markets, so we are likely to see more evidence for that, or evidence that they are Giffen goods in more markets. We may also see evidence that other cheap staples are Giffen goods.
Comments
Moneyterms Blog > More cross price elasticities[...] from my previous post (which, I failed to mention, included several things previously mentioned in a series of posts by [...]