Knowing and Making

The snow in America seems to be pushing consumers out to the right-hand end of the demand curve. So how should retailers respond? First Marginal Revolution  (Alex for once) points to this Bryan Caplan article: A blizzard is about to hit DC...people unsurprisingly rushed to grocery stores to stock up....For any given type of product, the most popular brand always sold out first. There were no Eggo waffles, but plenty of Wegmans brand waffles. All the national brands of hot dogs and sausages were gone, but there were plenty of obscure sausages still on the shelves. Can you guess my explanation? Click through to the MR link to see my answer in the comments, or look at the comment from Eric on Bryan's page for a similar idea. Then Pricing for Profit asks the question: how should hardware stores optimise their profits when everyone wants a snow shovel? By now of course the answer is clear - at least if they have any foresight. Simply get a bunch of cheap shovels with an unusu...

Scott Sumner has got me spotting supply and demand mistakes all over the place. This post combines that theme with the question of ' the price of anarchy ', outlined by Gravity and Levity last week. Niall Ferguson has blended both of them into a particular detail of his FT article on "lucky" Barack Obama . It would take a long time to critique the whole article, but here's the salient point: Iraq is likely to become more unstable as US troop levels are reduced. Now on the surface, that sounds obviously correct. But how about if we turn it around to make the real causality clear: US troop levels are being reduced as Iraq becomes more stable. The thing about supply and demand, like any equilibrium system, is that any change tends to create a pressure to counteract itself. In this case, the reduced "supply" of anarchy has increased its price, thus reducing the production returns on its complementary good, the US Army. Thus the army's supply curve shif...

Scott Sumner has published a couple of good articles about the difficulty of understanding supply and demand, and Robert Peston's posting today may be an excellent illustration of that. Robert says: Here's the great and resonant unknown of the moment. Is the credit contraction a reflection of less demand from you, me and millions of others? Or are the banks rationing much more than they had been doing? The answer is - probably - a bit of both. But does that make any sense? Well, it could - but is it plausible that demand for loans just happens to fall at the same time as the banks tighten their standards? And why would the banks "ration" credit anyway? Professor Sumner might give a simpler explanation. Occam's razor, as you know, says that the simplest explanation is usually the best. So can we identify a single cause of this phenomenon? Yes we can. Imagine that there is a stable market for credit in 2007. Then just one thing happens: the supply curve for loans ...