A Failure of Introspection
Demand elasticity is higher than it seems at the store
I’ve learned a lot more about the economy from introspection than I have from statistics. If someone shows me statistical evidence that people buy more chocolate when its price goes up, my reaction will be “I’ve bought lots of chocolate, and I would buy less if the price went up. Wouldn’t you? Come on.”
But introspection, like statistics, has its problems. A case in point: When you’re in a store, introspection typically reveals that you are not very price sensitive. If you go to the store to buy some carrots, how high does the store’s price have to get before you cross carrots off your list? The usual answer is: Pretty high. If you repeat this exercise for your whole grocery list, you’re likely to conclude that your demand curves are highly inelastic, and markets are a lot less competitive than most economists would have you believe.
The problem with this exercise: It assumes you’re already at a particular store. Yes, if you get to a store and see high prices, you’re probably pay. But are you going to return to that store? Or – let’s introspect again – are you going to think “That store’s a rip-off, I’ll go somewhere else”? At least that’s my reaction – how about yours?
The lesson: Just as the solution to sloppy statistics is better statistics, the solution to sloppy introspection is better introspection.
The post appeared first on Econlib.
I see you wrote this a decently long time ago originally. In the modern world, it might be worth considering that we have different substitute goods than we did 20 years ago.
Consider a lowley pound of hamburger. The cost per pound scales with the number of adjectives. By that, I mean: "Pastured grass-fed locally raised organic Kobe-style" will be significantly more expensive than the "industrially farmed" grass-fed beef.
For the people who were doing well enough to buy Magic Beef before, they were never price sensitive to begin with. But everybody else can shift down the cost stack and still get the same outcome, but potentially with less health benefits or more guilt. It's the same choice we used to have, except it was "Laura's Lean" or "Name Brand" or "Store Brand".
Now there's at least a dozen tiers of every commodity grocery, from pasta, through eggs and beef, to chocolate. Personally, if I got into a pinch, I would continue shopping at the same store but would strip some adjectives from my choices, specifically related to how much they reduce my sense of guilt.
For example, I won't compromise on genuine cage-free eggs, which are pushing $8 a dozen now - frankly, absurd. And I acknowledge the absurdity. But I will buy my ground beef from a different local farm that's maybe not quite as pastured. I won't substitute my favorite apples (Cosmic Crisp!) for inferior apples. But I'm happy to substitute the hand-raised organic orange cauliflower for the pedestrian store brand with the black spots on it.
I sound like a rich, smug jerk, but I cheap out all over the place in the rest of my life. My truck is a 2006. But given all that, am I going to go to a different store? Hah! Not a chance.
I suppose it's important to differentiate between the elasticity for carrots in general and carrots from this store. But is that how economists think about elasticity of demand?