Wednesday, 3 August 2016

Arguing from a quantity change... Shrimponomics edition

Yesterday I set out a list of the best bits from the new Levitt and Dubner book "When to Rob a Bank", but I held one bit back for today. When teaching introductory microeconomics (ECON100 and ECON110), we try to teach our students not to argue starting from a price or quantity change, and instead start from a change in demand or supply. This is challenging for them, because when we look at markets we see prices (and to a lesser extent quantities). So it's tempting to jump straight to interpreting any change in the market first as a price change (or a quantity change).

Which made the discussion in this post on Shrimponomics from the book interesting to me:
A few days back I posed the question “Why are we eating so much shrimp?” Between 1980 and 2005, the amount of shrimp consumed per person in the U.S. has nearly tripled...
I asked the question because Shane Frederick, a marketing professor at MIT’s Sloan School, had contacted me with an intriguing hypothesis. He wrote about a striking regularity in the responses he got when he asked different people why we are eating so much shrimp:
"Psychologists (indeed, probably all non-economists) give explanations that focus on changes in the position of the demand curve — changes in preferences or information etc., like:
1) People are becoming more health conscious and shrimp are healthier than red meat;
2) Red Lobster switched ad agencies, and their ads are now working;
and so on.
Economists, by contrast, tend to give explanations that focus on “supply,” like:
1) People have designed better nets for catching shrimp;
2) Weather conditions in the Gulf have been favorable for shrimp eggs;
and so on."
I found Shane’s hypothesis compelling. When I teach intermediate microeconomics, the students seem to understand demand a lot more easily than supply, even though (1) they see demand first, and (2) the graphs and the equations are almost identical for supply and demand, except that the labels on the variables change. Most of us have a lot more experience being consumers than producers, so we tend to view things through the lens of demand rather than supply. We need to have an appreciation of supply factors trained into us by economists.
I wonder what my students would have made of this question? Maybe I should include it in a future test or exam? I have to admit that my initial reaction to the question was wanting to also know what happened to price (not just quantity).

Knowing what happens to price would allow us to sort out the competing explanations. An increase in quantity traded over time is consistent with any of three basic possibilities: (1) an increase in demand (in which case price should rise); (2) an increase in supply (in which case price should fall); or (3) both (in which case the change in price could be in either direction). [*]

Which of the above is correct? According to Levitt, it turns out probably (2):
I’m not exactly sure, but here is what I can glean from the Internet. A key factor is that prices have dropped sharply. According to this academic article, the real price of shrimp fell by about 50 percent between 1980 and 2002. When quantity rises and prices are falling, that has to mean that producers have figured out cheaper and better ways to produce shrimp. This article in Slate argues that there has been a revolution in shrimp farming. Demand factors may also be at work, but they don’t seem to be at the heart of the story.
Although an absence of evidence on an increase in demand doesn't mean it didn't also happen, so (3) remains a possibility too.


[*] There are two other possibilities of course - a relatively large increase in supply coupled with a relatively smaller decrease in demand (and price would fall); and a relatively large increase in demand coupled with a relatively smaller decrease in supply (and price would rise).

1 comment:

  1. In a similar vein, given the increasing price of houses - Is it a demand or a supply issue? Most government policies seem to be addressing the supply side. RBNZ has a weak tool for addressing the demand side. And Gareth Morgan suggests another with his CCIT. But has anyone actually considered which constraint is causing the price rise or is having the strongest effect?