Elasticities of Demand and Supply Practice Test

The key idea is how sensitive food demand is to changes in income, i.e., the income elasticity of demand for food. In low-income countries, households start from a low baseline of consumption and spend a large share of their income on food. When income rises, they can afford more food and a better mix of foods, so the quantity of food demanded rises by a relatively large percentage for a given percentage increase in income. That creates a relatively high income elasticity for food.

In highly urbanized or high-income countries, food consumption is already more saturated and diversified, so increases in income produce smaller proportional changes in the amount of food bought, leading to lower elasticity. Intermediate-income countries fall between these extremes. So the demand for food is most elastic in countries with low income levels.