This week’s SPINCycle newsletter from NC Spin contained something billed as “An interesting story about eggs and gas.” The newsletter introduced the story with this disclaimer:
We do not make a habit of forwarding e-mails like this, but NC SPIN panelist Joe Mavretic passed this along to us and we do the same with you. Joe doesn’t take credit for writing this piece and we don’t pretend to agree totally with the thoughts behind it, but there is some sense [sic] here.
I included “sic” in the quotation because I’m hopeful that “sense” was a typo and that the intended word was actually “nonsense.” You see, I had received the same story in e-mail two weeks ago, forwarded to me by my colleague Joe Coletti. Joe had received it from someone else, and he was passing it along for entertainment value to me and the others in the research staff — under the subject line “Early econ test” and with the introduction of “What’s wrong with this story?”
I read the story and realized three things: (1) it is complete nonsense, and (2) it’s just the kind of nonsense that perpetuates because people react emotionally to gasoline prices, and (3) it is such long-winded, tedious nonsense that people with good economic sense will likely avoid responding because of the time involved.
Nevertheless, such a thing — bromidic bumf that it is — deserves a response. See, even SPINCycle is passing it along now. Bad economics shouldn’t be allowed to hold sway just because it has cornered the market for argument ad nauseam.
For that reason, I am publishing my remarks to Joe as I made them.
Joe, I’m providing my remarks in maroon. It’s my tribute both to Bugs Bunny and my appreciation for the level of thinking that went into this particular piece.
Jon
The Price Of Eggs
A man eats two eggs each morning for breakfast. When he goes to the grocery store he pays .60 cents a dozen. Since a dozen eggs won’t last a week he normally buys two dozen at a time.
One day while buying eggs he notices that the price has risen to .72 cents. The next time he buys groceries, eggs are 76 cents a dozen. When asked to explain the price of eggs the store owner says, “The price has gone up and I have to raise my price accordingly.”
This store buys 100 dozen eggs a day. I checked around for a better price and all the distributors have raised their prices. The distributors have begun to buy from the huge egg farms. The small egg farms have been driven out of business.
— This would mean that something has caused an upward shift in demand for egg — perhaps the Atkins diet craze, repudiation of research on negative health effects of eggs, future boxers inspired by “Rocky,” or something else. Presumably the small egg farms were driven out of business before the demand shift, and could not produce at a cost below the market price for eggs.
The huge egg farms sells 100,000 dozen eggs a day to distributors. With no competition,
— No competition? It says egg farms.
they can set the price as they see fit. The distributors then have to raise their prices to the grocery stores. And on and on and on. As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there.
— In other words, the customer suspects a cartel in operation. Yet apparently the price of eggs, now higher, is still clearing the market. Presently, the market dynamics are such that they have not yet induced others (back) into egg farming.
He checked out the huge egg farms and found they were selling 100,000 dozen eggs to the distributors daily. Nothing had changed but the price of eggs.
— Wait: this scenario implies that there WAS no demand shift, only that (a) small egg farms stopped producing and (b) the huge egg farms colluded to fix the price. This makes no sense —it seems either to assume (a) that egg demand is perfectly inelastic, or (b) that the demand shift perfectly coincided with the dropout of the small egg farms — but they are not coming back despite a nearly 27 percent increase in retail price. But (b) seems precluded by the fact that “Nothing had changed but the price of eggs.” SURELY the author doesn’t mean perfectly inelastic demand.
Then week before Thanksgiving the price of eggs shot up to $1.00 a dozen. Again he asked the grocery owner why and was told, “Cakes and baking for the holiday.” The huge egg farmers know there will be a lot of baking going on and more eggs will be used. Hence, the price of eggs goes up. Expect the same thing at Christmas and other times when family cooking and baking increase.
— Apparently this has never happened before? It doesn’t seem to be that unusual, although one might expect for egg farmers to plan ahead for seasonal variations in demand — but not knowing the industry well myself, there may be opportunity costs (egg laying hens vs. roasters, for example) that prevent such a thing. And no other competitors enter the market during seasonal peaks? Curious.
This pattern continues until the price of eggs is $2.00 a dozen. The man says, “There must be something we can do about the price of eggs.”
— The market price for eggs is now 233 percent higher and STILL no other suppliers are getting into the market? If this “pattern” is still nothing changing but the price of eggs, that makes no sense. And the pattern apparently still relies on an assumption of perfect inelasticity in egg demand. Perfectly stupid.
He starts talking to all the people in his town and they decide to stop buying eggs. This didn’t work because everyone needed eggs. Finally, the man suggested only buying what you need.
— But presumably they were buying only what they needed (or thought they needed at the time)? How is the man to know others’ needs?
Then again, if this exercise relies on the assumption of a perfectly inelastic demand, then it must also assume perfect insight1 into others’ egg-buying needs on the part of the man, and near-perfectly silly people who buy far more eggs than they need — that they choose to use money and time to buy eggs instead of, say, buying asthma medication or insulin, or going to work rather than spending several hours chatting up the grocer despite having been threatened with a loss of employment for neglecting work in favor of eggs, or something like that.
He ate 2 eggs a day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.
— So on top of the above assumptions, we’re to believe that this man had happened upon a person’s correct “need” for eggs, and he was able to persuade others to adopt his habit? (And how is it that the man suddenly was able to purchase eggs individually instead of bundled by the dozen?)
The grocery store owner began complaining that he had too many eggs in his cooler. He told the distributor that he didn’t need any eggs. Maybe wouldn’t need any all week.
The distributor had eggs piling up at his warehouse. He told the huge egg farms that he didn’t have any room for eggs would not need any for at least two weeks.
At the egg farm, the chickens just kept on laying eggs.
— Oh, come on. I think the writer is laying an egg. This scenario is so far removed from reality that it is hard to comment on further. On top of everything else, now that we have — however improbably — a significant downward shift in the demand for eggs (a demand which is still perfectly inelastic, just shifted downward — everyone is still buying a set number of eggs regardless of the price, but that set number is now lower), we also have egg farmers who are oblivious to this demand shift and have not adjusted their production accordingly, as if they are also oblivious to opportunity cost (such as other uses for the chickens).
To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price. The distributor said, ” I don’t have the room for the %$&^*&% eggs even if they were free.”
— This cartel is so oblivious that it hasn’t realized it can adjust its production to two eggs per citizen and still charge 33 cents per pair of eggs. Too bad the citizens gave up their egg fetish; if they could have waited out the 233 percent price increase, it would have gotten the other farms back in.
The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying again. The grocery store owner said, “I don’t have room for more eggs. The customers are only buying 2 or 3 eggs at a time.”
— Wait — I thought the grocer had stopped buying eggs. Is he physically incapable of stopping buying eggs? Maybe he has the same problem the rest of the townspeople had, buying more eggs than he needs? Are there any medical studies on this town? Is his customers’ sudden reluctance to indulge themselves with eggs feeding his neurosis?
And what about substitutes? Have the townspeople found substitute goods to suit their un-needs? They’ve cut back and appear to be saving money — what’s it going toward?
“Now if you were to drop the price of eggs back down to the original price, the customers would start buying by the dozen again.”
— Oh wow. Now this neurotic grocer shares in the man’s perfect insight?
The distributors sent that proposal to the huge egg farmers. They liked the price they were getting for their eggs but, them chickens just kept on laying.
— Eggsasperating!
Finally, the egg farmers lowered the price of their eggs. But only a few cents. The customers still bought 2 or 3 eggs at a time.
— See? Perfectly inelastic.
They said, “when the price of eggs gets down to where it was before, we will start buying by the dozen.”
— Hmm, maybe not. A stepwise elasticity? Why not; we’ve already got omniscient neurotics. Oh, so apparently at 5 cents per egg they’ll give in to their egg fetishes again? They can control it? Where are the nanny-state government types rushing to place a floor on the price of eggs to keep these people from destroying themselves by buying more eggs than they need?
Slowly the price of eggs started dropping. The distributors had to slash their prices to make room for the eggs coming from the egg farmers.
— Slowly or slash?
The egg farmers cut their prices because the distributors wouldn’t buy at a higher price than they were selling eggs for.
Anyway, they had full warehouses and wouldn’t need eggs for quite a while.
And the chickens kept on laying….
Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn’t sell. The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price.
And the customers starting buying by the dozen again.
— Poor sick freaks…
Now, transpose this analogy to the gasoline industry.
— No, you do it. This ought to be good …
What if everyone only bought $10.00 worth of gas each time they pulled to the pump.
— How much is ten dollars’ worth of gas, exactly? I thought your analogy was being transposed. You had citizens buying discrete units of eggs. Shouldn’t everyone here then buy discrete units (gallons) of gasoline? Are you going to cap the number of visits to the pumps? Do you allow for time costs?
The dealers tanks would stay semi full all the time.
— They would? How full is “semi full” exactly? One assumes it’s a range. Otherwise you’re stuck assuming there will be no depletion. Not that I’d put such an assumption past the author at this point.
The dealers wouldn’t have room for the gas coming from the huge tank farms.
— TANK FARMS?!?
And now there’s “no room”? See, I knew I couldn’t dismiss an assumption of no depletion.
The tank farms wouldn’t have room for the gas coming from the refining plants. And the refining plants wouldn’t have room for the oil being off loaded from the huge tankers coming from the Middle East.
— Wow, America! Just think. If you only bought ten dollars’ worth of gas per fill-up, that gas materializes out of nowhere! Eureka! We’ve discovered the secret to never-ending gasoline! (I wonder how many gallons that $10 buys. It’d really stink if it were only a few. But maybe you could buy $10’s worth, replace the nozzle, and start over again. How would the tank know? Just to be safe, put your sunglasses on before starting over.)
Just $10.00 each time you buy gas. Don’t fill it up. You may have to stop for gas twice a week but, the price should come down.
Think about it.
— No. Trust me. Don’t think about it. Thinking about it causes painful paroxysms of laughter. My sides hurt.
As an added note…When I buy $10.00 worth of gas, that leaves my tank a little under half full. The way prices are jumping around, you can buy gas for $2.65 a gallon and then the next morning it can be $2.15. If you have your tank full of $2.65 gas you don’t have room for the $2.15 gas. You might not understand the economics of only buying two eggs at a time but, you can’t buy cheaper gas if your tank is full of the high priced stuff.
— And improbably, the writer nears comprehension of replacement costs. But what’s all this crap about having your tank full? I thought your tank at Optimum Fill-Up was under half-full. What’s the problem?
Also, don’t buy anything else at the gas station. Don’t give them any more of your hard earned money than what you spend on gas until the prices come down.
— Equally improbably, he nears comprehension of marginal costs. But is it my imagination or is he assuming perfectly inelastic demand for gasoline? I’d be careful, if I were him — I wouldn’t want to leave with egg on my face, as it were.
Wait. That’s it? The End?
Note
1. Some others out of our group told me later that they thought the man wasn’t telling his neighbors to adopt his egg-consumption habits, but that they consumed as he did, two eggs a day. That probably is what the author intended, but it’s not clear in the text because it says “Finally, the man suggested only buying what you need. He ate two eggs a day.”
So I may have missed the point with my inference of “perfect insight” into consumers’ true egg needs on behalf of the man in the example. In my defense, that was because I was incapable of comprehending the greater idiocy of eggs materializing out of nowhere – at least not until reading the author’s more explicitly made theory of gasoline materializing out of nowhere.