Zimbabwe has in recent times been battered by massive inflation. That’s seen us rise from nearly negligible inflation to the highest inflation rate in African and the second highest in the world. One effect of this has been a reduction in retail volumes. While the idea of price elasticity of demand is simple on the surface it is a deep theory that can explain some of the things we are dealing with in our economy today.
How Price elasticity works
Price elasticity of demand is an economic concept used to measure the responsiveness of demand to changes in price alone. How do those purchasing a product respond to upward or downward changes in its price? This excludes issues like access challenges and other bottlenecks that may affect demand.
An example we can hopefully all relate to is walking into the supermarket to find that doughnuts are on special, a two for one sale is on. It’s more than likely that people will increase their doughnut demand that day. Conversely arriving to find that doughnuts have doubled in price would result in reduced demand. Just how much of a reduction/increase would be experienced is exactly what price elasticity of demand measures.
For our situation, we have to consider something before going further. While prices in our RTGS dollar terms have increased in real (US Dollar) terms they are largely stable. However, incomes have not increased in RTGS dollar terms and so have fallen in real terms. So what we are truly discussing in terms of our markets is income elasticity.
In this regard there are three types of goods (products is the more appropriate term as this applies to services as well);
Inferior goods have a negative income elasticity meaning their demand increases with a reduction in disposable income. They are so named because they tend to be substituted to preferred goods and are only turned to because of distressed disposable incomes. Ordinary goods have a positive relationship with income increase and will see increased demand where incomes rise. Superior goods refer to items which have higher prices and will take up a greater proportion of income as it increases.
The concepts of income elasticity are consistent with what we have experienced as a nation over the last 9 months going back to October 2018. Confederation of Zimbabwe Retailers reported a broad reduction in retail demand since the introduction of the RTGS dollar and the new exchange rules. Figures from the Reserve Bank of Zimbabwe and Zimstat also indicate that import volumes have been markedly reduced in the same period.
While certain types of products respond differently to income elasticity within ranges. Food items may be replaced by inferior items as incomes reduce but there is a limit to how far down that holds. Similar increases in incomes will result in increased consumption of certain goods but only to a point. Understanding the complexity in our economy caused by the currency situation with the RTGS dollar clears up some of the illusion with price increases. All this to say that income elasticity is evident in our country.