Published on 2 Jan 2015
In this lesson, we investigate how prices reach equilibrium and how the market works like an invisible hand coordinating economic activity. At equilibrium, the price is stable and gains from trade are maximized. When the price is not at equilibrium, a shortage or a surplus occurs. The equilibrium price is the result of competition amongst buyers and sellers.
April 8, 2015
April 3, 2015
May 15, 2014
BBC News has terrible news for craft beer fans:
Hops are hot. Their price in the US has doubled in 10 years. Some even predict the equivalent of Armageddon for beer lovers — a hops shortage.
The reason is craft beer, which has come from nowhere to claim 8% of the US beer market.
Far more hops go into craft beer than the equivalent produced by large corporate brewers — roughly six times more. The brewing revolution has triggered a shift away from bland, high-yield alpha hops to the “aroma” varieties responsible for the striking citrus notes in craft beer. It is a “double whammy” — more hops needed but they are of the varieties that are less productive.
By next year, acreage will be planted 60/40 in favour of aroma varieties, says Ann George, director of Hop Growers of America. It used to be 70/30 the other way. The hop plants take a couple of years to be productive. It’s going to be touch and go. “Craft breweries are opening faster than farmers can grow hops,” reported US online magazine Vox.
Clearly this calls for a blue-ribbon panel to recommend government solutions to the impending doom of higher prices! Let’s set up a bureaucracy to allocate the market so that all current brewers get a fair share … and of course, we must protect the companies already in the market from upstart competitors! We should have the first report in by 2016, which will allow the new organization to be set up by 2018 or so, and by 2020 the market will be fully regulated and operating smoothly under the benevolent guidance of government officials.
Or, y’know, let the market decide. Which it appears to be doing nicely — demand for more aromatic hops is up, so prices have risen to the market-clearing level. Higher prices for hops are signalling to hop producers that they need to produce more, to take advantage of the higher prices. Higher prices are also telling brewers that they need to economize in the short term or raise retail prices for the hoppiest brews to reflect the higher input costs. Knowing that a shortage is possible — signalled by higher prices now — means that brewers will adapt quickly (or, for a few less-well-managed firms, go out of business).
April 2, 2014
In the Harvard Business Review, Paul Oyer explains some of the changes in the market for adopting dogs over the last decade or so:
Lots of people are looking for a canine companion to brighten their lives, and there are always plenty of dogs “on the market” at shelters or through breeders. Yet, too many dogs don’t find homes, and they often pay the ultimate price (especially if they are in Sochi). So what stands in the way of dogs and owners finding one another?
For starters, the supply and demand at any given time in any given area is typically thin and random. Thankfully, online pet boards have thickened the market by enabling potential adopters, especially those who want to rescue a dog, to find a broader range of options rather than just settling for what the shelter happens to have the day they go there. Sites such as petfinder.com lead to many adoptions, many of which cross significant geographic territory.
A second problem — and this is much harder to solve than the thin-market problem — is there are a lot of duds on both sides of the dog adoption market, and it’s hard to tell exactly who they are. A breeder could describe a bad, Cujo-like dog as “good with children” while potential owners like Michael Vicks’ former associates would surely claim they would give a dog a safe home.
Shelters address this issue by thoroughly screening would-be adopters (I have always found it ironic that they give you your baby to take home after it is born with no questions asked, but you have to jump through a lot of hoops to adopt a puppy or kitten that will otherwise be euthanized.) But there is no evidence that these screenings are very effective.
February 10, 2014
At Ace of Spades HQ, Monty gives an introduction to Say’s Law:
Jean-Baptiste Say, an 18th-century economist and follower of Adam Smith, recognized one of the most fundamental laws in all economics: the entirely common-sense observation that consumption requires production. This axiom is called Say’s Law of Markets.
However, this axiom is often mis-stated as “production creates its own demand”. This is incorrect — production is necessary for consumption to take place, but production anticipates demand, it does not cause it. Production is speculative in this sense. The simple act of producing some good or service does not, in and of itself, create demand for that good or service. (This is true even for basic commodities.)
What Say’s Law really says is that production is the source of wealth. Market-driven production creates value and provides choice to consumers. Inventors and innovators bring new products to market, and as consumers are exposed to these new products, demand rises with the utility or desirability of these new products. New markets are opened by innovators who are able to tap into needs and wants that consumers didn’t even know they had until a new product or service is offered.
And he explains why money is not wealth:
So what is “wealth”, really? (I could write a whole book on the difference between “wealth” and “money”, but I’ll try to boil it down.) Wealth is options. Wealth is choice. Wealth is variety. Wealth is agency — being able to do what you want to do when you want to do it. Wealth is surfeit — having more than the essentials of life. It is comfort, leisure, ease — or at least the agency and option (those words again) to avail oneself of leisure. Simply put, wealth is stored value that can be drawn down in various ways, only some of which involve the exchange of money for goods and services. And how is wealth created? Through production, because production must necessarily precede consumption.
Money correlates with wealth because money is a medium of exchange and a store of value. Rich people have a lot of money because they are wealthy, not the other way around. Wealth allows us to buy a bigger house or better car or nicer furniture. It pays for a nice dinner for two at an upscale restaurant. Note well: wealth buys these things, not money per se. Consumption is the draw-down of wealth, not the simple expenditure of money.
Money is the oil in the machine of an economy, but money is not in and of itself wealth. If I am stranded on a desert island with a thousand gold coins, I am just as poor as if I were a homeless vagrant living in an alleyway somewhere, because I cannot exchange my gold for things I want or need. It does not give me options or variety or comfort. My gold facilitates neither production nor consumption absent a market mechanism that makes use of it.
May 18, 2013
A market I have to admit I was almost completely ignorant about, but it’s poised to become a very busy, competitive market if it can overcome a few hurdles:
There’s been a digital explosion in the market for pre-owned fashion. In the past year, we’ve seen a veritable land grab in the online consignment and resale space with the number of “re-commerce” sites now exceeding 50 — and many more, no doubt, incubating in Silicon Valley, New York, London and beyond. Several market levels are being addressed: mall/high street (Threadflip, Tradesy), thrift (LikeTwice, NiftyThrifty), upmarket (TheRealReal), haute vintage (Byronesque) and boutique (ReFashioner, my own company).
It may seem like these sites are dealing in a mere by-product of the fashion industry. But no, this is the product. Everything that’s bought becomes pre-owned. A tidal wave is building and it has the power to undermine or even destroy. Indeed, the stockpile of merchandise is overwhelmingly vast. I did the math in 2009 for ReFashioner’s beta, a luxury fashion swap site: $880 billion trapped in closets. And that’s just high-end womenswear in the US.
[. . .]
As with flash sales, this inventory is delimited by the retail market. And it’s wayward. The ROI sucks when every SKU is singular and inventory is locked up — literally — in houses. And there’s something of a standoff between buyer and seller: the non-professional seller, accustomed to seeing 100 percent mark-ups in the real world, wants top dollar for her career basics and contemporary designer wear, while the buyer wants Zappos-like service, Etsy pricing and Net-a-Porter merchandising. There are other issues too: resistance to higher ticket items without fittings, sketchy return policies, knock-off trading.
But there’s more. This merchandise is personal. It’s not just a numbers game, it’s about everything fashion means to us. It’s about honouring the past of the clothes and their place in our lives. If this is going to work, we need to add content and context. Idealistic, maybe. But idealism is how things get changed and idealism can work to the advantage of this category.
H/T to Virginia Postrel for the link.
January 22, 2013
Water is often described as a “natural monopoly”, because most of us only encounter a water bill from a municipally owned water utility company. But there are other markets for water where the price varies exactly the same way as it does for other commodities:
Earlier this year the Aurora Sentinel reported that the city will sell $9.5 million worth of water to an energy company. Why? Because the company is offering four times the price offered by other customary buyers. Potential profits in oil and gas make the water highly valued by drillers. Of course, this valuation is subject to change along with the prices of oil, crops, and all of the other resources required to produce them. If oil prices decline relative to crop prices, drillers will bid less for the water and farmers more, and water will flow to its most highly valued use. In other words, when markets are allowed to work, it’s a beautiful thing.
Public utility customers aren’t used to, and don’t really understand, how a free market works when it comes to water. Because a local water utility is seen by most economists as a natural monopoly, retail costs are fixed at low levels despite potential fluctuations in supply and demand. These low costs are accomplished not only through price fixing, but also through rationing (i.e., the public utility regulates when and how much water can be used, rather than consumers responding to true prices).
Water rationing usually affects what the utility considers a low-value use of the good, such as lawn watering. You are permitted to water your lawn only during certain hours, on certain days, and for a certain amount of time. Even if you have a prize-winning English garden in the middle of a desert and would gladly pay more for water, you aren’t given that opportunity. The guy next door with the dandelion lawn, whose sprinkler spends more time spraying the sidewalk than the grass, has no incentive to be more careful with his water, except when he’s forced to follow the directive of the local authority and water his sidewalk on Tuesdays and Thursdays between the hours of 6 and 8 p.m.
Because there is no price incentive for the average public utility water customer to respond to, there are very few creative conservationists. Instead, public utilities resort to ridiculous advertising campaigns aimed at persuading their customers to use less of their products. You’ve probably received the flyers or seen TV ads sponsored by your water and electric utilities offering tips on how to use less. A more direct way to economize on water and energy use might be to let prices fluctuate for public utility customers like they do for customers in the wholesale market.
December 23, 2012
If you’re a big gold fan, you might want to look at the CombiBar, which is a gold wafer that can easily be broken down into one-gram portions:
Private investors in Switzerland, Austria and Germany are lining up to buy gold bars the size of a credit card that can easily be broken into one gram pieces and used as payment in an emergency.
Now Swiss refinery Valcambi, a unit of U.S. mining giant Newmont, wants to bring its “CombiBar” to market in the United States and build up its sales presence India — the world’s largest consumer of gold where the precious metal has long served as a parallel currency.
Investors worried that inflation and financial market turmoil will wipe out the value of their cash have poured money into gold over the past decade. Prices have gained almost 500 percent since 2001 compared to a 12 percent increase in MSCI’s world equity index.
[. . .]
The CombiBar is particularly popular among grandparents who want to give their grandchildren a strip of gold rather than a coin, said Andreas Habluetzel head of the Swiss business of Degussa, a gold trading company.
Other customers buy gold for security reasons.
“Demand is rising every week,” Habluetzel said. “Particularly in Germany, people buying gold fear that the euro will break apart or that banks will run into problems.”
H/T to Tyler Cowen for the link.
April 7, 2012
Tim Harford on the recently imposed “hosepipe bans” in parts of southern England:
But it was chucking down with rain this week. It was snowing, too. How can we be talking about drought?
Water isn’t like electricity: it can be stored, within limits. You don’t get a water shortage if you have a dry week and you don’t cure a water shortage with a few April showers. You get water shortages after a couple of years of low rainfall.
And how do you cure water shortages?
Hosepipe bans, apparently.
Is that a good idea?
Probably not. It’s appealing for the water companies because the revenue they receive is capped by the regulator. They can’t make more money by supplying as much water as possible to as many joyful customers as they can reach. It’s easier to just yell at customers to stop watering their lawns. It might be annoying but the water companies don’t lose much as a result.
[. . .]
You’re not suggesting a “flushing the toilet ban”?
I am not suggesting any kind of ban. It’s the idea of the ban that’s problematic. A new article by economists Jeremy Bulow and Paul Klemperer analyses the advantages to consumers of rationing schemes rather than simply raising the marginal price. The bottom line: the advantages are typically illusory. Rationing reduces supply, relative to what could be provided if prices were higher. It also misallocates resources — there’s no reason to expect that the people who get the scarce product are the ones who value it most. And rationing encourages all kinds of fun and games to try to get around the rules.
So you just want water to become more expensive.
I hope water will become cheaper, on average. But I certainly want it to be expensive to use lots of water at a time of shortage. We want everyone to have an incentive to save some water and the obvious way to do this is through water metering.
May 17, 2011
Sorry, of course I mean when you leave for your seat at the right hand of God. For a small advance fee, you can be (relatively) certain that Fluffy or Rover will be seen to by After The Rapture Pet Care:
In case you hadn’t heard, Judgment Day is pencilled in for 21 May and any Christians among you who hadn’t made provision for your pets’ wellbeing after the Rapture had better pull your fingers out before you take your place at God’s right hand and your poor moggy is left stuck here on Earth staring at an empty bowl.
Make no mistake, this is serious. Harold Camping, the 89-year-old founder of Family Radio, has spent years scouring the Bible for evidence of just when it’s time for believers to pack their celestial suitcases. True, they had to unpack again back in September 2004 following Camping’s first shot at naming the big day, but he assures that this time it is “absolutely going to happen without any question”.
So, you’re ascending to eternal glory and your cat’s litter needs changing. It’s an upsetting thought for any true follower of Christ, but help is at hand in the form of another creature absolutely guaranteed to be left behind by the heavenly mass exodus: the atheist.
November 16, 2010
If what “Ed Dante” writes is true, lots of writers are missing out on a rich — unethical — opportunity:
I’ve written toward a master’s degree in cognitive psychology, a Ph.D. in sociology, and a handful of postgraduate credits in international diplomacy. I’ve worked on bachelor’s degrees in hospitality, business administration, and accounting. I’ve written for courses in history, cinema, labor relations, pharmacology, theology, sports management, maritime security, airline services, sustainability, municipal budgeting, marketing, philosophy, ethics, Eastern religion, postmodern architecture, anthropology, literature, and public administration. I’ve attended three dozen online universities. I’ve completed 12 graduate theses of 50 pages or more. All for someone else. …
You would be amazed by the incompetence of your students’ writing. I have seen the word “desperate” misspelled every way you can imagine. And these students truly are desperate. They couldn’t write a convincing grocery list, yet they are in graduate school. They really need help. They need help learning and, separately, they need help passing their courses. But they aren’t getting it.
For those of you who have ever mentored a student through the writing of a dissertation, served on a thesis-review committee, or guided a graduate student through a formal research process, I have a question: Do you ever wonder how a student who struggles to formulate complete sentences in conversation manages to produce marginally competent research? How does that student get by you? …
Of course, I know you are aware that cheating occurs. But you have no idea how deeply this kind of cheating penetrates the academic system, much less how to stop it. Last summer The New York Times reported that 61 percent of undergraduates have admitted to some form of cheating on assignments and exams. Yet there is little discussion about custom papers and how they differ from more-detectable forms of plagiarism, or about why students cheat in the first place.
Read the whole thing.
October 7, 2010
I make a living buying and selling used books. I browse the racks of thrift stores and library book sales using an electronic bar-code scanner. I push the button, a red laser hops about, and an LCD screen lights up with the resale values. It feels like being God in his own tiny recreational casino; my judgments are sure and simple, and I always win because I have foreknowledge of all bad bets. The software I use tells me the going price, on Amazon Marketplace, of the title I just scanned, along with the all-important sales rank, so I know the book’s prospects immediately. I turn a profit every time.
I’m pretty sure I first heard about the practice of shopping for books with laser scanners in a story on NPR, which, as I recall it, disparaged their use as classless. And, really, it is precisely this. The book merchant of the high-cultural imagination is a literate compleat and serves the literate. He doesn’t need a scanner, because he knows more than the scanner knows. I fill a different niche — I deal in collectible or meaningful books only by accident. I’m not deep, but I am broad. My customer is anyone who needs a book that I happen to find and can make money from.
My economics side says this is a good thing: connecting buyers with their desired purchases. My bibliophile side says this is somehow morally wrong . . . or if not precisely wrong, then tainted or shady. I’m not sure how to reconcile my feelings.
May 19, 2010
There are so many restaurants now that some of them can even specialize to serve tiny demographics . . . like “restaurants created specially for the tastes of the slightly stoned, slightly drunk chef after work.”
Even preschool teachers unwind with a round of drinks now and then. But in professional kitchens, where the hours are long, the pace intense and the goal is to deliver pleasure, the need to blow off steam has long involved substances that are mind-altering and, often enough, illegal.
“Everybody smokes dope after work,” said Anthony Bourdain, the author and chef who made his name chronicling drugs and debauchery in professional kitchens. “People you would never imagine.”
So while it should not come as a surprise that some chefs get high, it’s less often noted that drug use in the kitchen can change the experience in the dining room.
In the 1980s, cocaine helped fuel the frenetic open kitchens and boisterous dining rooms that were the incubators of celebrity chef culture. Today, a small but influential band of cooks says both their chin-dripping, carbohydrate-heavy food and the accessible, feel-good mood in their dining rooms are influenced by the kind of herb that can get people arrested.
December 16, 2009
America debated three strategies during the Cold War. The Right wanted “roll back” — dreams of Patton driving his tank into Red Square. The Left wanted détente — which is French for “surrender.” The country loosely followed containment, a program outlined by George Kennan in 1946, which argued that the political contradictions of the Soviet state would eventually cause its own demise. America had but to be patient.
Kennan may have been the first to realize that a society based on Communism would not survive politically, but it was Ludwig von Mises, in his 1922 work Socialism, who demonstrated that any such society could not survive economically.
When a collection of free individuals — the market — is willing to pay a price for a product that creates “excess” profits, it signals producers to provide more of that product. If the market does not support a given price, producers are forced to redeploy their assets for more pressing social needs. Similarly, if a factor of production, such as labor or capital, changes in price, producers instantly react, sending signals — through the prices of intermediate goods — down to the consumer. Prices effortlessly allocate society’s assets to reflect consumer preference and adjust to accommodate the ever-changing availability of scarce resources.
Mises argued that governmental interference in prices, through taxation, subsidies, and regulation, complicates this process — affecting not only the consumption of final goods, but also the economic calculations that are necessary to provide intermediate goods and services. Higher-order division of labor fails. Poverty results. For example, while Chinese and Russian central planners were busy setting quotas for steel mills, there was no method for consumers to signal that they preferred food — and millions starved to death.
Dan Oliver Jr., “Socialism in Stages: Even soft, incremental expansions of government produce poverty”, National Review, 2009-12-15