Tuesday, November 10, 2009

Downwardly Sticky

We often tell students that one of the reasons markets don't adjust quickly is that prices are sticky. We emphasize that they are especially sticky to the down side. By that, we mean that while most suppliers (whether of products, resources, or labor) or more than happy to see their price move to the upside, they are reluctant to adjust in the other direction.

A corresponding aspect of this is downwardly sticky consumption. Once we get used to consuming certain levels of goods or services - a certain standard of living, we are reluctant to give it up.

Here's an article from today's issue of The Wall Street Journal (free content at this writing) that examines this behavior. (Note: it includes a good video, an interesting slide show, and links to some thought-provoking parallel articles.)

I think it has some possibilities for discussing decisions in the marketplace; and I think it has some real uses in personal finance courses. Students could read the article and easily make lists of behaviors that were self-defeating when faced with no income and limited resources. And the list doesn't have to just deal with what the individuals "could have done." In some cases, there are behaviors that are still going on that could be changed.

This discussion gives you a chance to revisit concepts such as choice, value received, marginal cost/benefit, and opportunity cost. You can even ask students what they have given up or would be willing to give up to help their family “make ends meet.”

I look forward to your comments.

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