Thursday, July 18, 2013

Increasing Your Supply of Shortages

Every teacher of economics needs examples of shortages: more specifically, examples of a situation in which the quantity demanded exceeds the quantity supplied at the prevailing market price. Robert S. Goldfarb is on the job with examples and insights in "Shortage, Shortage, Who's Got the Shortage?" in the most recent issue of the Journal of Economic Education (44: 3, pp. 277-297). Goldfarb provides six categories of shortages, and offers examples of points to make in the classroom and possible quiz or discussion questions for each. 

Category 1: A Demand Deadline Enables a Short-Run Shortage

Useful examples here are popular Christmas toys, where quantity demanded runs ahead of quantity supplied as the big day approaches. Examples over the years include Zhu Zhu Pets in 2009, Tickle Me Elmo in 1996, Transformers in 1984, Cabbage Patch Kids in 1983, and all the way back to Shirley Temple dolls in 1934. Goldfarb also suggests flu shots as an example of shortages in this category.

Category 2: Dynamic Shortages due to Lags in Supply or Demand

If demand shifts out faster than supply can adjust, or supply shifts back faster than demand can adjust, a shortage can emerge. Goldfarb offers the example of the nursing shortage, where demand rises faster than supply can keep up, and so even with rising wages, a shortage persists: "[A] dynamic shortage is like a dog chasing its tail—and perhaps occasionally catching it.”

Category 3: Market Prices Set by Suppliers Below Market-Clearing Levels

An example here would be tickets to popular performances or athletic events, from the Super Bowl to Bruce Springsteen, and even popular restaurants that choose to book fully or have lines rather than to raise prices. The reason for such behavior is usually phrased in terms that consumers feel better about a seller who doesn't extract the highest possible dollar value, even when that same consumer may be paying for a higher-priced ticket sold by a re-seller or scalper.

Category 4: Prices Set or Regulated by Government (and/or Quantity Regulation)

A homely classroom example here would be the price of parking, which in many cities is set so that quantity demanded exceeds quantity supplied. More complex examples include the price of traffic congestion, which is often set at zero, but even on many toll roads is not set in a way that eliminates congestion.

Category 5: Capacity Choice in the Face of “Regular” Variance in Demand

In certain industries, like airlines and hospitals, the provider needs to make a decision in advance about what total quantity to provide. In these cases, it will usually make sense for the provider not to set up capacity for the highest likely spike in demand, because that would mean too much unused capacity at other times. Also, there are often some users of airlines and hospitals who can shift demand across time if necessary.

Category 6: Sudden Unexpected Supply Shocks

The standard classroom examples here are how weather affects agriculture. Goldfarb adds a lovely example about egg consumption in Mexico, with references. Apparently, Mexico has just about the highest per capita egg consumption of any country. But in 2012, a spread of avian flu led Mexico's government to slaughter 11 million chickens, just when the price of chicken feed was spiking. Egg prices doubled, and sometimes spiked even higher. There were 2-hour lines to buy eggs, and some sellers limited how many cartons of eggs each person could buy. Apparently, the president of Mexico made a "promise to bring egg prices down—and to punish speculators . . . A program to monitor the sale of eggs has led to investigations of 1,299 retailers for possible price gouging.” Another example is how storms like Hurricane Sandy lead to gasoline shortages and arguments over price-gouging. (Here's a post from June 13, 2011, on "The Case Against Price Gouging Laws.")

As Goldfarb notes, it's probably not useful to have a greatly expanded discussion of shortages in the supply-and-demand part of a class. My own experience is at some point, after about the third example, students experience the MEGO ("my eyes glaze over") effect. But many of these kinds of examples can be used in discussions of slow adjustment speeds, government regulation, difficulties of forecasting the future, and the like. Thus, they offer ways of strengthening the earlier supply-and-demand lessons about shortages in later parts of the class.