Pertanika 12(1), 119-123 (1989)

Estimating the Income and Substitution Effectson the Demand for Poultry Meat

ZAlNALABIDIN MOHAMED and ROSLAN A. GHAFFARDepartment of Economics,

Faculty of Economics and ManagementUniveTsiti Pe1tanian Malaysia

43400 UP1VI Serdang, Selangor Darul Efuan, Malaysia

Key words: Poultry meat; demand; Slutsky equation; elasticity.

ABSTRAKKertas lmja ini cuba menganilisis dan menentukan faktor~faktor yang mempengaruhi flermintaan dagingayam di Malaysia. Saara Spesifik, ianya cuba melihat perubahan terhadap permintaan daging ayam yangdisebabkan oleh perubahan harga, pendaf](ltan dan juga terhadap fJerubahan harga barang-bamng yangberkaitan dalam pasaran daging. Dua model pennintaan daging ayam telah diuji, ianya adalah f1el'5amaantunggal dan fJel'5amaan pembolehubah 'instillmental'. Di samping itu juga persamaan Slutsky juga digunakanuntuk menganggar kesan pendapatan dan gantian terhadap daging ayam dibandingkan dengan daging­daging yang lain. A nalisis menuniuhlwn bahawa daging ayam adalah barang biasa dan daging lembu danbabi adalah barang flengganti bagi daging ayam. Walau bagaimanapun keputusan yang bercmnfJUmn di­dapati di antam hubungan daging aymn dengan ikan. Berdasarkan hepada kesan penggantian dan keanjalansilang hmga, didapati permintaan ikan adalah tidak berkait dengan barang-barang lain.

ABSTRACTT'his study attempts to analyse the factors underlying the demand and consumption trends of POUlt1] meatin lVIalaysia. Specifically, it explores the poultr), meat consumfltion due to changes in prices and inrome andthe interaction in demand between flOUltry meat and the components oj the rest of the meat market. To obtainthe pammeters of the demand model for poultry meat, two estimation techniques were used in estimating thedemand model, namely single and instrumental variables approach, while Slutsky equations were utilized toestimate the inrome and substitution effects of flotllt1] meat with the other components of the meat madiet. Theresults indicate that poultry meat is a normal good while both beef and pork are substitutes to poultl), meat.However, mixed results were obtained for f)oultry meat and fish. Based on the magnitude of the substitutioneffect and cross p17ce elasticity, it is concluded that the demand for fish is independent of the other comf)onentsof the meat market.

INTRODUCTIONThis study attempts to estimate and evaluatethe consumption pattern of poultry meat. Spe­cifically this paper explores the effect on poultrymeat consumption due to changes in pricesand income of the consuming population. Alsoincluded in the analysis is the nature of theinteraction in the demand between poultry meat

and the components of the rest of the meatmarket.

This study is motivated by several reasons.First, despite the impressive growth of theMalaysian poultry sector l , a review of the litera­ture reveals that there is inadequate informa­tion with regard to the demand structure ofpoultry meat and its implications 011 the rest of

I A recent account of the de\'elopments in the poultry sector are gi\'en in Mohamed tl Ill. (1988).

ZA[NALABIDIN MOHAMED AND ROSL-\l'i A. GHAFFAR

the red meat subsectors. A few empirical stud­ies that have been conducted include those byNg Yoke Yen (1976) and by Lee Peng Seng(1980). Considering that these studies are quitedated, more recent information on poultry meatdemand is warranted.

Poultry meat is one of the several meatsavailable in the Malaysian market. Questionspertaining to the substitutability or comple­mentarity of poultt)' meat with respect to theother meats (eg. mutton, pork and beef) alsoneed to be answered. It is reasonable to consi­der the demad for poultl)' meat to be less res­ponsive to price changes as it is acceptable toall communities in Malaysia. This question, how­ever, has not been rigourously investigated. Anattempt along this line can be gleaned from thestudy done by Mohamed el al. (1988). Thepresent study, however, differes in the sensethat it also makes use of the Slutsky equationto measure the net substitutability/ complemen­tarity of poultry meat with otermeats. In orderto analyse the substitutability or complemen­tarity effect of poultt)' meat on other meats, twomodels will be presented. The first model is alinear demand equation for poultry meat.Parameter estimates from this model are thenused in model II which is basically the Slutskyequation to obtain the mean substitution effectbetween poultry meat and the rest of the meatproducts. Thus from such an analysis, the netsubstitution or complementarity betweenpoultry meat and other commodities men­tioned can be measured.

The rest of this paper is presented in threesections. The method and data used in thisstudy will be presented in the following section.In section three the empirical results and somediscussion on the results will be presented. Thelast section provides our summary and conclu­sIOn.

THE MODEL SPECIFICATION

ModellThe demand function for poultry meat can bewritten as follows

where

Q" = aggregate per capita consumption ofpoultry meat (kg)

Pa

= retail price of poultry meat ($/kg)Ph = retail price of beef ($/kg)P = retail price of pork ($/kg)pPI = aggregate retail price of fish ($/kg)YI = aggregate per capita income ($/year)U = random disturbance terms

The signs of the variables appearing onthe right hand side are expected to conform todemand theory. The sign upon own price is ex­pected to be negative, which implies an inverserelationship between price and the commodityconsumed. The substitute or competing andcomplementary items are expected to have adirect and inverse relationship, respectively, withthe commodity consumed. In this regard theexpected sign is positive and negative respec­tively. Lastly, a positive relationship is also ex­pected between the commodity consumed andthe aggregate per capita income.

A linear additive form of equation wasutilized to analyse the demand function. In thiscase, two versions of the demand equation forpoultry meat were formulated and estimatedusing two different techniques, namely Ordi­nary Least Squares (OLS) and the InstrumentalVariables (IV) approach.

Model IIThe second model is the comparative statics ofthe utility maximization model in the form ofSlutsky equations which can be presented as

(2)

where

X; = quantity of the ith commodity demandedPi = price of jth goodY = per capita income

The alphabets y, u, and p, which appearas subscript and superscript in equation (2)indicate income, utility and price, respectively,and are held constant.

The Slutsky equation can be broken upconceptually into two parts. The first term onthe right hand side of equation (2) is the puresubstitution effect, or a response to a pricechange holding the consumer on the original

]20 PERTANTKA VOL I~ NO.1, [989

ESTIMATING THE INCOME AND SUBSTITUTION EFFECTS ON THE DENIAl D FOR POULTRY MEAT

indifference surface. The second term on theright is the pure income effect where incomeis changed, holding price constant, to reach atangency on the new indifference curve. Invok­ing the envelop theorem (Silberberg, 1978) forthe cost minimization problem, the subtitutioneffect can also be written as

In shon, equation (3) can be further rewrittenas

8XUK = -' (4)

'.I 8PJ

where X, P and Y, and 8*, y and p are defined, J

as before.According to Philips (1974) the total effect

of price changes 8Xi'/8P; is negative if 8X//8Y> 0 or if 8X'/8Y < 0 and 18X'(8X'/8Y) I <IK, I,,~hich applies for normal g~od. The totaleff~ct of a change in price, 8X//8P j can be

Positive if 8X'/8Y > 0 and 8X~(8X~/8Y)< IKI,I I I 1.1

which is the case for Giffen paradox. Hence thegood is superior if 8X

j'/8Y > 0, and inferior if

8X~/8Y < O.I On the other hand as indicated by Hick's

(1946) based on total substitution effect, K,, 'I

goods i and j are classified as substitutes,complements or independent depending onwhether K,j is positive, negative or zero, respec­tively.

Thus given the means of the observedvalue of X(X = 1, 2 and 3), that is, the three

J Jmain variables in equation (1) and the regres-sion coefficien ts estimated from the equation,the substitution and income effect betweenpoultry meat and other meat can be estimatedthrough Model II.

SaUTee of DataYearly time series data have been used for theperiod 1960-1984 and were obtained fromvarious sources. Consumption data were ob­tained from the Division of Veterinary Services(DVS), while data on price were obtained fromvarious FAMA (Federal Agricultural Marketing

Authority) bulletins. Popultion, income and con­sumer price index (CPI) were obtained fromvarious Malaysia Plans and Economic Reports.All retail prices and income data were deflatedby CPI (1967 = 100). The per capita consump­tion figures were derived by dividing the totalconsumption with the total consuming popUla­tion.

RESULTS AND DISCUSSIONThe estimation procedure used for estimatingthe demand equation was ordinary least square(OLS) with Cochrane-Orcutt Interative Technique(COlT) to adjust for serial correlation for thesingle equation. Since we are also estimating theaggregate demand equation for poultry meatin a system of equations, the instrumental vari­ables technique (IV) were utilized to alleviatethe simultaneity bias. The instrumental variableschoosen in th is case are Pb' Pp and Pr

The results for both OLS and IV estima­tor of model I are presented in Table 1. Theresults for the linear equation show that, exceptfor Pf which has a negative sign, the signs onPa, Pb, Pp and Yare met as expected. Althoughthe expected signs on all varibles, except fish,do conform to demand theory, statistically, thesevariables are not significant at the 10% proba­bility level. The adjusted coefficient of determi­nation (R~) is 0.96 which indicates that approxi­mately 96% of the' variation in poulo)! meatconsumption can be explained by the variationin the exogenous variables. For the IV estima­tor, the results in Table 1 show an improve­ment in the significance of the variables in themodel especially for pork price and per capitaincome. However, the adjusted coefficient ofdetermination was also 0.96~

Thus given the estimated coefficients fromModel I, Model II can be estimated without dif~

ficulty. Table 2 presents the substitution, in­come and total effect for both OLS and IVapproaches.

The results as presented in Table 2 showthat the total effect of a change in own priceis negative which indicates that poultry meat isa normal good. While according to Hick's de-

, Another demand model was estimated for both OLS and IV approaches by dropping the price of fish from the model.All variables do conform to demand theol)'. However the coefficient, R2 and level of significance do not cliffeI' from

Model I.

PERTANlKA VOL. 12 NO. 1. 1989 121

ZAINALABIDIN MOHAMED AND ROSLAN A. GHAFFAR

TABLE 2Estimated substitution, income and total effects

of poultry meat with n:spect to other meat:Model II

indicating that poultry meat is a normal good.Beef appears to be the stronger substitute forpoultry when compared with pork, which isconsistent with the finding in Model II. How­ever the cross-elasticity between poultry meatand fish is very inelastic, almost approachingzero.

finition, both poultry meat and beef, poultrymeat and pork are substitutes. However, theresults obtained for poultry meats and fishgenerated by the OLS and IV approaches aremixed. In the single equation approach, thesubstitution effect indicates that poultry meatand fish are substitutes while in the simultane­ous equation it is a complement. Nevertheless,the total effect indicates that both poultry meatand fish are complementary to each other.

TABLE 1Estimated regression coefficients and summary

statistics for poultry meat demand equationOLS IV

"'The subscripl ab, ap and af indicates that IE. SE ann TEof puultry mcal and beef, poullry mcal and pork, andpoullry meat ann fish respectively.

TABLE 3Estimates of elastici tics of demand

for poultry meat

On the other hand the own price elastic­ity was inelastic in the case of the IV approach.However, pork seems to be a stronger substi­tute than beef, which is opposite to the OLSresults. Again the cross-elasticity of poultry meatwith respect to fish is very inelastic. Thus fromthe above discussion one can conclude that fishis an independent good with respect to poultry

0.01710.00400.01680.0495

- 2.47012.49482.4948

- 0.2091

- 2.4530.79442.5116

- 0.1596

Fish Income

0.07390.01740.07240.2138

- 3.98190.89760.3367

- 0.006

- 3.90810.91500.40910.2078

Beef Pork

0.428 0.138 - 0.0014 0.168

9.369 0.835 - 0.047 0.377- 0.777IV

Pouluy

OLS -1.244

Income effects (IE)

T.ta

T.i1 )

T.tp

T.d

Total Effect (TE)

Substitution effect (SE)

The question now arises as to what levelor magnitude of the substitution effect can indi­cate the degree of independence of the twocommodities. Nicolaou (1977) suggests that ifthe value obtained is around 0.2 and below, itcould be considered as an independent good.Alternatively, according toJohnson, el at. (1984)using the eleasticities one could also tell thesubstitutability and complementarity of twogoods. Table 3 presents the elasticity coefficientscalculated at the mean of the observed valuesfor poultry meat with respect to its own price(P ), p , P , P and Y for both OLS and IV

a h p I

approaches. For the OLS equation, the ownprice elasticity for poultry meat is elastic at -1.2

Figures in paren theses are standard crrorsSignificant at 5% probability len:'l

** Significant at 10% probabilit)' level

Variable OLSa IVa

Intercept 12.029 1.9603

P - 3.9824 - 2.5751" (1.0944)"' (0.7123)*

Ph 0.8976 0.7907(0.8962) (0.8192)

P 0.4019 2.4948I'

(1.0701)(0.5674)

PI - 0.0060 - 0.2091(0.2532) (- 0.2488)

y 0.0095 0.0022(0.0120) (0.0046)**

Adjusted R" 0.96 0.96

F - Statistics 102.50 133.93

122 PFRTANIKA VOL. 121\0.1. IlJ8lJ

ESTI\IXII"C THE I"!COME A:\D SUBSTITUTION EFFECTS ON THE DEMAND FOR POULTRY MEAT

meat consulllption. It is to be noted that, theresults pertaining to the substitution effect orincome effect, total effect, and elasticities de­pend upon whether the mean of X

j(j = 1, 2

and 3) provide realistic value for Xj' whetheror not K. is siunificant, and lastly, whether or

~l 0 .not the model is correctly speCIfied.

CONCLUSIONThis study is an attempt to estimate the de­mand for poultry meat in Malaysia. The vari­ables were selected based on economic theoryand a priori expectation. The results indicatethat poultry meat is a normal good while bothbeef and pork are substitutes to poultry meat.Mixed results were obtained between poultrymeat and fish. It is concluded that fish is an in­dependent good based on the magnitude ofthe substitution effect and cross price elasticity.Hence the results from Model II and the com­puted elasticity values are generally consistent.

The chanue in income was also found toouenerate little response in poultry meat con-o . .sumption as indicated by the income elasticity.The results seem to be in conflict with the valueof 1.9 and 1.02 obtained by Ng Yoke Yen (1976)and Lee Peng Seng (1980) respectively. vVhilediffering sampling periods and estimation pro­cedures may contribute to the difference, onecan also be confortable with the idea that poultrymeat may no longer be a luxury item as it wastwenty years ago. Thus there is a great potentialfor the expansion of poultt)' meat consump­tion as it is appealing to every class of thepopulation.

REFERENCESDNISIOi\ of VETERINARY SERVICES. Various reports.

FAi\1A. Various issues of FAi\1A Bulletin.

HICKS, J.R. 1946. Value and Capital, 2nd ed.Oxford: Oxford University Press.

jOI'I)/SO" R.S, Z HAIR HASSAN and R.D.GREEN. 1984. Demand System Estimation Method

and Applications. Ames: The Iowa States UniversityPress.

LEE PE)/G SENG. 1980. Demand Analysis of Live­stock Meat in Peninsular Malaysia. UnpublishedProject paper, Universiti Pertanian Malaysia.

MAL\YSIA. Ministry of Finance. Economic Reports,various issues.

MAL'l.YSIA PLANS. Prime Minister Department. Vari­ous issues.

NG YOKE YEN. 1976. Demand Analysis of the Live­stock Meats and Projection of the Demand forLivestock Meats and Feedstuffs in West Malaysia.Unpublished Project Paper, University of Malaya.

NICOlAOU, G.B. 1977. The Place of Petroleumin the U.K. Fuel Market. Applied Economics, 9: 167­172.

PHILIPS, 1.. 1974. Af)plied Consumption Analysis.Amsterdam: onh Holland.

SILBERG. 1978. The Stl1lctllre ofEconomics: A Mathe­

matical Analysis. McGraw-Hill Book Company.

ZA]i\AURlDIN MOHAMED, MAD NASIR SHAMS 'DIN andROSL\J'\; A. GHAFFAR. 1988. Staff Paper o. 2,A Study of Demand for Poult1), Meat in Malaysia.Department of Agricultural Economics, Univer­siti Penanian Malaysia.

(Received 27 July, 1988)

PERTANIKA VOl.. 12 NO.1, 1989 123