Economics all around you
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
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.