Tag Archives: Microeconomics

A supply-side giffen good?

The Oregonian reports that farmers face a choice to grow grass and wheat and they chose to grow more wheat.  The problem? Wheat prices have been falling and are currently at their lowest. Doesn’t that seem a bit odd? Some say it is only a phenomena found in the Willamette Valley.  Farmer’s say that they want to increase output in order to provide more cash flow. So, as wheat prices are falling, they are increasing their supply.  This is obviously backwards.  Supply curves are supposed to be upward sloping where if the price increases, producers will increase quantity.

This reminds me of that weird theory called Giffen goods that always got tacked on when learning about demand curves in economics class.  Giffen goods, although only observed on the demand side, experience an upward sloping demand curve (price goes up, quantity demanded goes up) which is contrary to the law of demand that says it is downward sloping (price goes up, quantity demanded goes down).

Using the same logic of the Giffen good with the farming example, you can say this is sort of a supply-side Giffen good.   Instead of an upward sloping supply curve, (price goes down, quantity supplied goes down) the farming example has a downward sloping supply curve (price goes down, quantity supplied goes up).   Some fancy econometrics would need to prove it but I think I can explain intuitively why the farmers are doing it.

1) They are constrained by their ability to produce. They can either produce wheat or grass, but nothing else, and not both.

2) They are constrained by their income and don’t have enough cash to invest in alternatives.

3) They haven’t reached the shutdown point where their variable costs exceed their fixed costs. Since they are price takers, they have no choice.

So given their choices, the only way to profit maximize is to produce wheat at a lower price since grass fetches for even lower.

I could be wrong about this, so please comment if I am mixing up my economics.  I am assuming that this is a long-run behavior.  The farmers are given enough time to make a decision regarding falling wheat prices. I am aware of the assumptions in the short-run.  So that maybe what the debate, at least in economics, would be about.  Nevertheless it is an interesting exercise in understanding perfectly competitive markets and how it influences producers behavior.

Now that’s a complement!

Turns out cigarettes and gambling are complement goods: (here)

State video gambling tax receipts plummeted by nearly 18 percent in the last quarter of 2009, buffeted by the beginning of a statewide indoor smoking on bars and casinos and a recession that hit Montana hard.The gross video gambling-machine taxes will be about $12.5 million for the quarter that ran from October through December 2009, said Rick Ask, administrator of the Gambling Control Division in the state Justice Department. That’s about $2.7 million, or 17.8 percent, less than what the tax revenues were the previous three months, from July through September 2009.

The quarterly gambling-machine taxes are down by 16.8 percent, or $2.5 million, compared with the previous three-month period from September through December 2008, Ask said.

It certainly shows the unintended consequence of a policy that although is good at heart; can hurt the bank. So why would gambling and cigarettes be complements? Does nicotine help relieve the stress of losing money? Maybe smoking has a direct effect on one’s discount rate for gambling.