Volume CXXXIII, Number 15 February 8, 2002 f

Economics all around you
RACHEL CONNELLY
FACULTY CONTRIBUTOR

This happens to me all the time. I go to the dentist or to a party or meet a friend of a friend. Before too long the conversation turns to, "So what do you do?" If I answer, "I am an economist" (as opposed to "I am a college professor" or "I read to my children" or "I keep United Airlines in business by constantly flying between Portland, Maine and Beijing" ....) the next question is invariably something like, "How long do you think the recession is going to last?" or "Do you think the stock market has hit bottom?" or (the worst) "What do you think the Fed (that's Federal Reserve Bank in case you are not up on the lingo) is going to do to interest rates next week?"

My answer to all three of these questions is the same, "I have no idea." Usually I refrain from the next half of the response which is "and I really don't care all that much." The truth is I am not a big fan of macroeconomics nor do I have much interest in those sorts of questions. But give me a grocery store, an open-air market, or even an airline terminal and I am a very happy microeconomist.

I was in Chicago's O'Hare Airport recently, and everywhere around me were signs of the changes that are taking place in air transportation. There is now a line control apparatus that rivals Disneyland (I wish I had thought to invest in the company that makes those posts and webbings.)

And what is this? We now have two choices at security, the regular security line which snakes almost all the way to Portland and back, and the "priority" security line. It seems there is a new privilege of flying first class and that is that you get to stand in a shorter line though security. Now that is worth something! Getting on the airplane first is nothing compared to knowing you will have a shorter line through security.

In a world where time is money, you and I differ in the value we place on our time. We might value our time at our hourly wage rate or we might add to that a premium for the unpleasantness of standing in line. So people who are willing to pay first class ticket prices usually also have a higher value to their time and thus will appreciate this new "privilege."

Do I like standing in line? No, but I (on my faculty salary) am not willing to pay for the privilege of not standing in line. And thanks to microeconomics I understand why.

You don't need to travel to find economic lessons. Just wander downtown to Shop and Save. Why are oranges on sale this week? That one's easy. The season for oranges is late winter. The supply of oranges to the market is greater. In order to get more consumers to buy oranges, the producers need to lower the price of oranges.

Okay, but here is a harder one for you: "Why are Cheerios on sale this week?" Are they "in season?" Did General Mills produce too many boxes of Cheerios? Probably not. Cheerios are on sale periodically in order to increase General Mills's profits. How so? Well, think about consumers as being of two types: the ones who buy whichever brand of cereal is on sale and the ones who always buy Cheerios.

By putting a storable products like Cheerios on sale the company can sell to both groups but the average sales price will be higher (because the ones who always buy Cheerios buy them every week, even when they are not on sale) than if they always sold Cheerios at the same price. So I buy five boxes when they are on sale and you buy a box every week. How can you not love the economics of grocery stores? I could go on and on. Ask any of my micro students.

But I won't. Just one more example.

I was riding my bicycle on a busy street in Beijing (actually the word busy is redundant here). I noticed an open air market on the right hand side. Looking at the market (I often shop there) I started thinking about why all the vendors selling pants were right next to each other and all the sellers of fabric were located next to each other. Did the authorities who governed that market require this or was it voluntary?

The economic theory of hot dog stands on the beach tells us that they might have chosen this arrangement voluntarily. Instead of locating two hot dog stands at either end of a linear beach, they can increase their profits by locating right next to each other in the middle of the beach. Is this what was happening in my Chinese market?

Bamm!! I bashed into the bicycle in front of me and learned another important economics lesson-stick to walking as you explore the economics of everyday life.