**Figure 8: Equivalent income effects, with zero or estimated elasticity (left panel), Equivalent income effects for Urban/Rural with estimated elasticity (right panel)**

_Source: KIHBS (2005/06), author calculations. Estimated elasticities used were estimated for each group of poor/non-poor and urban/rural. The estimates and description of the applied methodology is available in the appendix. Note: ‘Equivalent income effect’ reflects the estimated equivalent change in real income (compensating variation)._

**In the situation where households do not change the quantity of sugar they purchase in response to a price change, poor households will evidently benefit significantly more from lower prices.** A 20 percent decrease in prices will correspond into a 20 percent decrease in expenditure on sugar for all households and of course a corresponding increase in remaining disposable income.  However, households do not all spend the same portion of their budgets on sugar as we have already seen. As a consequence of their higher budget shares in sugar, poor households will be more affected by the change in sugar prices.  The solid line in the left hand panel of Figure 8 plots the average gains against log income<sup>47</sup> – this shows very clearly that poor households gain much more in relative terms from a decrease in sugar prices (and conversely that they are much harder hit in relative terms by high sugar prices).

**The poor still gain substantially more from price decreases in sugar, even when we account for changes in consumption patterns in response to a price change.** We would typically expect households to increase the quantities of sugar they consume in response to a decrease in prices.  However, in most cases we would also typically expect that total household _spending_ on the good would _decline_ – households use some of their ‘saved’ income from lower prices to purchase other goods. We can incorporate this kind of behavior into our estimates using _elasticity of demand_ , a measure of sensitivity to price<sup>_48_</sup> .  The dotted line in the left hand panel of Figure 8 incorporates estimates of the elasticity of demand for sugar in Kenya – here we can see that the positive impact of a price reduction on the poor is

> 47 This plot was estimated using a (non-parametric) lowess smoother implemented using the routine developed by Cleveland (1979) in Stata. Unlike regression techniques, this method does not require us to make any assumptions about the functional form of the average sugar expenditure share by log adult equivalent expenditure. Note that we have cut off the far left hand side of the distribution where almost all households consume zero as it is easier to understand visually, and there are very few households in this position.  Those households that do not consumer sugar at all are at _worst_ not affected at all by a decline in the price of sugar.

> 48 The price elasticity of demand is the percentage change in quantity demanded (on average) associated with a percentage change in price.  If the elasticity is between -1 and 0, then for a price decrease, _quantity_ consumed would increase, but expenditure would still fall (since the change in price would outweigh the change in quantity.

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