More cross price elasticities

Following from my previous post (which, I failed to mention, included several things previously mentioned in a series of posts by Greg Mankiw) I think I have spotted another cross price elasticity of demand. Chili in Sri Lanka.

It has always been the case that cheap food in Sri Lanka has contained more chilli. It disguises the flavour of poor quality ingredients, and it allows one to make make do with less of the more expensive ingredients: for example, the hotter a meat curry is, the more rice one needs to eat with.

This does imply that rice (and bread) are inferior goods: the poor eat more of them, the rich less.

I have noticed that, as food prices have risen, the food that I eat when I go out (I currently live in Sri Lanka) is becoming hotter. This applies across a range of places and dishes that were previously not hot: from the pieces of green chilli (which I removed as I ate) in the Cornish Pasty in the (unconvincingly) British style pub at the five star Cinnamon Grand Hotel, to a distinct spiciness in the chips at MacDonald's.

Given the tradition of using chili on cheaper food, the obvious explanation is that with input prices high and customers reluctant to accept price rises, restaurants are preserving margins by increasing the amount of cheaper ingredients, or reducing their use of subtler herbs and spices, and adding more chili for a cheap strong flavour.

There is one key fact that seems to contradict this, which is that the price of chilli has fallen over the last year. That is not a fatal problem as it is affected by production, world prices, import duties, and a variety of other prices. In addition, the really poor (heavy users for the reasons described above) may be using less chili simply because they are eating less food.

I have no figures for national consumption, but I have little doubt that at least some households (those that eat out a lot) have significantly increased their demand for chili. I admit that I lack rigorous numbers (but neither do many other commentators on the effects of the global rises in food prices). The underlying negative income effect on consumption of chilli certainly exists.

Comments

Hi

Excellent website. Explanations are easy to understand and well presented.

It may or may not be of interest but perhaps you could you add an interpretation of "Z spreads"

Regards

I have added z-spreads. Suggestions are always welcome, and usually followed.