Friday, August 1, 2008

The Price Mechanism and Demand

Julia is a regular commenter and lives in the shadow of the Golden Dome. She sent me a note about this op-ed piece in The New York Times by Dan Ariely, which she first caught thanks to Greg Mankiw.

Ariely wonders why get more agitated about rising gasoline prices as opposed to rising other prices. In the article he talks about the fact that the way we buy gasoline may have something to do with it. We stand there, watching the price dials spin faster and the volume spin more slowly (although the past week or so that trend is reversing, somewhat). This gives us time to reminisce about "the good old days." I try to wash the windows specifically in order to avoid that agitation.

Ariely also mentions that with food prices, we don't watch the prices spin up, and he also submits that we don't purchase multiple units. I suspect this is because of standardized packaging on most food goods. (Safely issues aside, imagine if you could only buy gasoline in 2.5 gallon containers - or whatever.)

Likewise, to borrow Ariely's examples, what if we bought bread by the slice or yogurt by the ounce in variable size packages, as we needed? Furthermore, I submit that many of us may purchase gasoline more frequently than we purchase groceries. And I'm willing to bet that the same definitely goes for the frequency of paying the electricity, natural gas, water or other bills.

If we confront price changes less frequently, and we pay for "single packaging", does the price mechanism become less effective? We can post the "per ounce" or "per unit" costs on the grocery store shelf or break out the cost on a utility bill, but it remains true that you confront the price less frequently and in different form. In turn, this may make it harder/easier to change behavior.

When confronted with an abnormally high electric bill we might call a family conference and encourage everyone try to cut back. The next month, if the previous entreaties have failed, we may institute family "fines" - that usually works until the bill payer gets caught.

Julie suggested that she would use the article in the coming school year to lead into the course and discuss opportunity cost. I think using this article for opportunity cost has some real possibilities. The feedback from the gas pump is immediate, and it's easy to visualize "what is my next best alternative."

I would suggest that this discussion of the price mechanism may also be used to explain aspects of price elasticity. One would think that the more frequently we confront prices; the easier it would be to change behavior, and change the elasticity of the good. But what is the reality? Is it easier or harder to cut back on certain groceries, utilities, entertainment or transportation? Why? Recent
data seems to indicate we're driving less; and that we're trading in some (not all) larger vehicles in favor of more fuel-efficient models. But how long did it take? Why wasn't it immediate?

This can also be related to how we consume - and how non-essentials are soon seen to be essential or even vital. And I think you'll find other interesting ways to use this article.

This will be my last post for a while. I'm taking a short break with the family before school reconvenes. I'll see you in ten days or so.


Anonymous said...

For that course:
it would be interesting to ask - who goes to the cheapest gas station and knows where the cheapest gas is?
who goes there even if it is 5 miles out of their way and is it still worth doing that? What did it cost them to drive there (and back)
who buys gas 5 or 10 bucks at a time - and why do they value their time so little?.
who has a tank lock to stop other people siphoning off their precious gas?

Now not everyone coupon shops, and not everyone bothers to track what they pay for groceries. Some people take the point of view they have more important things to do than that - that's for the little people... but bottom line is that most men and most women do shop differently. The guy wants something - goes in to a grocery store to hunt and (kill/get) that something - and then goes nuts waiting in line - amazed at the crappy service all the women are putting up with. Why should his precious time be so disrespected? I grew up poor - so I know what things tend to cost - and I know when they've gone up. I used to get liptons tea for 1.99 on the special or 2/5- on the less special. Last time I went into albertsons they were asking 5.99 a box. I couldn't believe it. Woollite went from 4.99 last year to over 10 bucks this year. Just shocking. You do get to choose where you shop. You do not have to overpay but the cost of not overpaying is tracking where the prices have less gouging. If you coupon shop you make immediate savings which are multiplied by not having to pay tax to get the money that you save.
Spend a dollar maybe have to earn 1.50 on the paycheck to get a dollar to spend. Save a dollar with coupons - and thats like earning 1.50 extra - tax free.
I never heard of anyone giving gas away free with a coupon from the newspaper. I've more than once had a box of tea free with coupon doubling.

Another factor on gas... in europe it isn't unusual for a vehicle to get 40-50 mp/gallon. Here its almost unheard of.
If the tea costs an extra 4 bucks a box - its a rip-off, but when the cafe sells a cup of tea, their costs went up maybe 4c a cup out of 1.50 to 2.50 they charge for the drink. When gas goes up, it costs more to drive to where they buy the tea wholesale, and more for the customer to drive to where they sell the customer the tea... and more for the employee to get to the cafe to make the tea - its clearly multiplying expenses for more people more rapidly than just the food going up in price... and the vehicles here are so pathetic on fuel economy in part because of traditional attitudes to what is reasonable fuel economy for a vehicle, in part because distances traveled are often very much greater (than in europe) and in part because fuel here even at an outrageous 4.50 per gallon is still only about half what people pay in europe.

Anonymous said...

Another point to mention could be also that while standing at the pump, watching the gas go up, people tend to feel the wait as wasted time. This could be drawn into opportunity cost by discussing if it is better to pump the gas yourself like we do now, or if there is a better way to do it that would have an opportunity cost that would be positive to us consumers.

Anonymous said...

the reason change probably takes so long is because people don't want it.
it takes people a lot of time to get accustomed to change whether it be good or bad.
that is my two cents