EclectEcon

A Drop in the Price of a Substitute...

It's straight-forward in introductory economics: a drop in the price of a substitute for good X shifts the demand curve for X to the left and leads to a reduction in the equilibrium price of X. Also if sellers of X anticipate that the prices of substitutes are about to fall, they will likely reduce their prices in anticipation of the drop in the prices of substitutes.

Here is an excellent example: Black Friday. In this case, X represents Canadian retail goods, and the substitute for which prices are dropping is US retail goods.

Today is not a holiday in Canada. We had our Thanksgiving back in early October. But because most of us live within a short drive of the US, many Canadians love to join the frenzy in the US and go shopping for bargains down there. 

According to a new poll by Angus Reid for UPS Canada, Canadian retailers can expect to lose one of every five shoppers to U.S. Black Friday-Cyber Monday discounts. Thirty per cent will be shopping for the holidays.

Merchants in Canada are responding by lowering their prices here; they are holding their own "Black Friday" sales, even though today is a regular work day for most of us.

Canadian retailers have good reason to be nervous today as the Black Friday phenomenon in the United States spreads further and runs longer.

Retailers north of the border are offering more of their own Black Friday deals, and more are getting in on the action.

... “If we can provide what [shoppers] are looking for on Thursday, then we may prevent a U.S. shopping trip on Friday, or at least get some of those sales at Sears Canada,” spokesman Vincent Power said.

Okay, you pedants, I realize that retailing isn't perfectly competitive; nevertheless, the supply and demand model works well to explain what is happening in this example.

 

 

Market Failure and Gubmnt Failure

As a result of the OWS and the walk-out of Greg Mankiw's introductory economics class at Harvard, many people have written many things. Paul Krugman has deferred to this article by Robin Wells. I find much to disagree with in her piece:

• She writes,

 Compared to past years, instructors need to acknowledge the limits of free markets earlier in their courses. Students should understand the difference between the conceptual importance of free markets and their real world limitations. Explain that much of the current economic distress arises from markets that don’t behave competitively -- the labor and financial markets.

But many of the problems over the past five years have arisen in part because of gubmnt regulations. Basel 1 and Basel 2 were regulations, designed by financial politicians. Also, Barney Frank et al encouraged the subprime market and the growth of mortgage-backed securities. And don't forget that the gubmnt bailed out Goldman, et al. indirectly by bailing out AIG.  If markets don't behave competitively, one important reason is gubmnt intervention in them.

• She writes,

 The dramatic rise in U.S. income inequality compels us as instructors to address it. 

This issue has been well-addressed by Ironman at Political Calculations, where he shows that personal income has, if anything, become more nearly equally distributed over the past 20 years. The growth in income inequality among households and families likely has more to do with demographics such as family formations, divorces, and assortative mating.

Further, to point to the gap in income between the developed and the developing world as something might be bad ignores the phenomenal growth in personal income brought about by trade in developing countries. Here, as usual, I refer to Krugman's wonderful piece on sweatshops, "In Praise of Cheap Labour".

• She writes,

 [I]nstructors who lecture on the superiority of free markets without acknowledging the dysfunction in the wider economy are at risk of appearing out of touch and exacerbating antipathy towards economics.

My reaction, in writing to MA about this was 

 "Instructors who lecture  on the failures of free markets without acknowledging the dysfunction of gubmnt and politicians are at risk of being out of touch with reality and exacerbating the seriousness of future crises."

If universities are failing, it is because there are too many professors in too many fields claiming to know what gubmnt should do to solve the problems of the world. If economists have a little humility and claim that while markets fail, so do "experts" and politicians, we should be lauded, not scorned, for providing balance to the typical elitism that passes for erudition at major universities.