Sunday, 24 July 2016

Sex in Greece for the price of a sandwich

This coming week in ECON100 and ECON110 we will cover supply and demand. One of the important aspects to understand is how prices adjust when market conditions change. So, let's take a recent example of the market for sex services in Greece, as described in this Washington Post article from last November:
Young Greek women are selling sex for the price of a sandwich as six years of painful austerity have pushed the European country to the financial brink, a new study showed Friday.
The study, which compiled data on more than 17,000 sex workers operating in Greece, found that Greek women now dominate the country’s prostitution industry, replacing Eastern European women, and that the sex on sale in Greece is some of the cheapest on offer in Europe.
“Some women just do it for a cheese pie, or a sandwich they need to eat because they are hungry,” Gregory Laxos, a sociology professor at the Panteion University in Athens, told the London Times newspaper. “Others [do it] to pay taxes, bills, for urgent expenses or a quick [drug] fix,” said Laxos, who conducted the three-year study.
When the economic crisis began in Greece, the going rate for sex with a prostitute was 50 euros ($53), the London newspaper quoted Laxos as saying. Now, it’s fallen to as low as two euros ($2.12) for a 30-minute session...
Ok, so how can we explain this large decrease in price? Consider the market described below. Initially the supply of sex services is S0, and demand for sex services is D0. The equilibrium price is P0 (€50) and the equilibrium quantity is Q0.

Then the severe economic crisis hits Greece, and many Greeks find it increasingly tough to survive financially. Women with few other options may move into the sex industry. This increases the supply of sex services to S1. Now, if the price was to remain at P0 (€50), there would be excess supply (or a surplus of services offered) - the quantity supplied at that price would have increased to Q2 (with the new supply curve S1), but the quantity of services demanded would remain at Q0. Some of the sellers will miss out on clients. So, in order to ensure that they aren't the seller that misses out, some sellers start to accept lower prices. In other words, sellers bid the price downwards, until eventually the price falls to the new equilibrium price P1 (€2). At that price, the quantity of sex services is Q1 (an increase from the original equilibrium quantity).

In essence, that is how we can explain price adjustments following changes in market conditions. Adjustment from one equilibrium price (and quantity) to another happens either through sellers bidding the price downwards, or buyers bidding the price upwards. Of course, this is very simple comparative statics (that is, we assume that the market will reach a new equilibrium), which won't be true in the real world because market conditions are constantly changing. However it is a useful simplification nonetheless, since the general finding that price increases when demand increases (or supply decreases) and price decreases when demand decreases (or supply increases) tends to hold true in most situations.

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