Tag Archives: demand and supply

05.23.2013 | Price Ceilings: Venezuelan Toilet Paper Shortages

One shopper had to search for toilet paper in 6 stores. Another arrived in a supermarket just after a delivery but was limited to a 4-roll maximum. Attempting to deal with its toilet paper shortage, the Venezuelan government has said it would import 50 million rolls. Because the country’s monthly demand for toilet paper is 125 million rolls, I wonder if 50 million is enough.

In addition…

Venezuela’s Central Bank Scarcity Index indicates that shortages of other items like cooking oil, sugar and cornflour are worsening. Just above 21%, the scarcity index tells us that for every 100 goods, 21 are not available in markets. Correspondingly, with an annual inflation rate close to 30%, purchasing power is sinking.

Venezuela's Scarcity Index from the Atlantic

So where are they? Venezuela’s President Maduro continues to cope with the perverse incentives that are the legacy of his deceased predecessor, Hugo Chavez. Even the recent increase in capped prices by 20% for several basics like milk, cheese, butter and beef had little impact. The gap remains between quantity demanded and quantity supplied.

Even with a 20% increase in prices, if the ceiling is below equilibrium, shortages result.

Our bottom line? Price ceilings lead to immense dysfunction:

Too much quantity demanded.
Not enough quantity supplied.
Huge transaction costs spent when people waste time searching store after store.
Inadequate resources allocated to developing oil wealth.
Factories operating way below capacity.

Sources and Resources: There are so many articles about the toilet paper shortages in Venezuela. Reuters, the BBC, Bloomberg all had something to say while my Scarcity Index is from The Atlantic.

Posted by: adminEcon
Tags: demand and supply, incentives, price ceilings, price controls, shortages, Venezuela
Comments (0) Add a Comment

05.16.2013 | Demand and Supply: Should Congress Unbundle Cable?

If I pay $100 for a 50 channel cable package, then choosing the 25 channels I really watch should cost me $25. Yes?

I suspect Senator John McCain agrees. But it might not work out that way if his legislative unbundling proposal is passed by Congress.

Currently, consumers buy cable packages that provide access to groups of programs. A typical bundle, this Comcast offer includes “over 160 channels…40 commercial free music channels …17,000 on demand choices” for “as low as” $49.99 for 6 months. In 2005, the average household watched only 15 of the 96 channels in its subscription and paid close to $600 annually.

So, would à la carte be better?

Demand:

According to academic studies, no one is sure if unbundling will save us money. One Temple University researcher unbundled cable packages into “7 mini-tiers by channel genre” and concluded that we would save 35 cents per household per month. On the other hand, one of 2 FCC studies concluded that unbundling would be beneficial but the other did not.

Trying to assess the impact on the consumer, economists have created alternative package scenarios. They have cited consumer surplus, transaction costs, “option value” and monopoly power. They list the other bundles we buy like season tickets and newspapers (a bundle of articles). They cite huge cable price increases and lack of choice.

Supply:

On the supply side, analysts refer to the high fixed costs that relate to the expense of wiring and establishing a network and then to the low marginal cost of expanding and implementing it. They remind us of programming costs and licensing fees. Unbundling could upset the revenue stream that facilitates the current industry structure. It could mean the demise of less popular channels. Or, it could encourage more productivity and new industry approaches.

So, with all of these demand and supply variables and more, how to decide whether unbundling makes sense? Maybe we don’t have to decide. One journalist suggests waiting for internet competition to upset the current market model.

Sources and Resources: While this WSJ article summarized the unbundling issues and alternatives most clearly, this academic paper has 51 pages of everything you ever wanted to know about cable TV and bundling. In addition, for lots more reading and the source of more of my facts, I suggest this New Yorker column, this Slate article, this Atlantic discussion and here is the McCain proposal. After reading it all, I can only say that the countless variables are all in flux because of technological innovation.

From “Unbundling Cable Television:An Empirical Investigation” by Dmitri Byzalov

Posted by: adminEcon
Tags: demand and supply, fixed cost, innovation, monopoly, unbundling cable TV packages, unintended consequences
Comments (0) Add a Comment

04.19.2013 | Monopolistic Competition: Cupcakes

The year was 2009, the GDP was sinking and unemployment soared to 10.1%. And yet, cupcakeries were proliferating.

Why? And why now, with the economy far healthier and the consumer far happier, are gourmet cupcake sales down?

Let’s start in 2009 with one cupcake entrepreneur who said a $3.00 cupcake cost her $2.45 to make.

ingredients: 60 cents
labor: 48 cents
packaging and merchant fees: 18 cents
marketing: 24 cents
mortgage payments, utilities: 57 cents
loan repayment: 16 cents
insurance: 4 cents
miscellaneous: 18 cents

She also needed $300,000 to purchase her 1400 sq. ft. store, got a $50,000 loan, and used $62,500 to set up and equip her storefront.

In a 2009 news article, a businessman predicted that cupcake stores would replace the ice cream store. Correspondingly, one market research firm cited a ripple of store openings beyond the “cupcake meccas” of NY and LA in Austn, Tex., Denver and Boston.

Fast forward to 2013.

Headlines shouted that the gourmet cupcake business was crumbling. Their example was Crumbs. The cupcake chain that was publicly owned and listed on Nasdaq as CRMB, Crumbs, went public during 2011. With the stock reflecting the trajectory of the business, during 2011 it hit a high just above $13.00 a share and now the stock is close to $1.30.

What happened? Sales are down. According to the firm, some stores were affected by Hurricane Sandy and there is more competition from individual bakers who can easily enter the market. In addition, one analyst cited “gourmet-cupcake burnout.”

Sounds like the cupcake business is coping with monopolistic competition. On the supply side we have lots of small businesses, easy market entry and exit, little freedom to determine prices. Add diminished demand and you can see the problem.

Sources and Resources: Displaying Crumbs’ and gourmet cupcake history, this 2009 article (and the source of my expenses list), this one from 2011 and a current analysis provide the details.

Posted by: adminEcon
Tags: demand and supply, factors of production, gourmet cupcakes, monopolistic competition
Comments (0) Add a Comment

05.23.2010 | Pay What You Want

The place is the SAME Cafe in Denver, a “pay-what-you-want” restaurant. Recently, one person paid $5 for a large soup and coffee and a second individual left $7.50 for 2 slices of pizza, a large soup, and a salad. Then, a third person decided $7.00 was a fair price for a slice of pizza, a salad, and an iced tea while someone left $1.50 for a large soup, a salad, and a slice of pizza. I checked out the reviews for the Cafe and they are overwhelmingly positive. Good healthy food, great atmosphere.

I don’t quite get it.

Yes, as a concept, “pay-what-you-want” has benefits. Those who cannot afford the price of a meal pay less but can volunteer time instead to compensate for their purchase. Those who can afford it pay more, enjoy a meal, and also know they are helping others. Based on SAME Cafe’s reviews, most experiece a communal pleasure. In addition, because the business is a non-profit, it pays no income tax and enjoys all nonprofit perks. With a semi-volunteers workforce, their labor costs must be diminished.

But I still have many economic questions. Demand/supply graphs tell us that price is determined by the intersection of what buyers are willing and able to spend and the amounts, at different prices, that suppliers can provide. Here, the costs of the supply side seem distant from price determination. If their variable costs such as the food, are not covered, then how can they stay in business? How can they plan for the future? Does it matter that government gets no revenue?

In a recent NY Times article, a similar venture from Panera Bread was described. Through a non-profit subsidiary, Panera Bread is trying out the “pay-what-you-want” concept. Here though, they provide patrons with a suggested price. I wonder whether a chain can generate the same spirit as a local establishment like SAME.

Another question: Does anyone leave a tip or is there no wait staff?

The Economic Lesson

I suspect we are not talking about a new business model. Instead, these are non-profit charitable ventures, just like Ben & Jerry’s had a charitable foundation that functioned with their for-profit ice cream business. Also, we are looking at the fallacy of composition which states that what is good for one becomes dysfunctional when everyone does it.

Posted by: adminEcon
Tags: demand and supply, nonprofits, pay-what-you-want
Comments (0) Add a Comment