Robert Heinlein once pointed out that with mathematics, history and languages you could understand the universe. Marginal revolution is a blog that features intriguing economics-related posts, helping you keep up to date with at least the first two of items of that curriculum, but all too often they preach to the choir and leave aside the actual math which would be necessary to understand their points (of course, you can always use Wikipedia).
Fortunately their latest post, Beware of Free Apples, does not shy away of a mathematical explanation when examining human behavior, and explains why price control of an item creates waste of a related resource.
I do have an objection with their model, however. On it they point out that the total costs of the laptops, factoring in time the user spent on line.
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At the controlled price the quantity demanded exceeds the quantity supplied so buyers compete to obtain the good by, for example, arriving early and standing in line (or stomping on their competitors!). Waiting in line is costly so the total price rises above the money price by the time price.
This I believe only applies, however, when the price for time units is interchangeable with money. Time is a resource of subjective value, and many people perceive it to be both cheap and inexhaustible (it’s neither, as far as I’m concerned, but that’s another matter). For these people, that cost of standing in line for 12 hours is insignificant compared to saving $300 on a laptop.
What would be interesting would be seeing other wastes of money and material goods introduced by this issue. For instance:
- Several people were hurt. Are they people factoring the medical costs associated with the purchase, plus their aggravation, against the $300 they’re saving?
- Private property was destroyed. How much did it cost?
- Police barricades had to be set up. Since the seller was the county government itself, this expense is coming out of its pocket. Was the money they made enough to cover the costs of maintaining order?
And of course, with it being a situation where demand is much greater than offering, some people were left without their laptops. Those had to pay the cost of entering the market, without showing any profit for their efforts.
Finally, there are those people that I wonder what the hell were they thinking:
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Donetta Graham, still recovering from a recent back surgery, arrived at 5:30 a.m. to purchase an iBook for her disabled daughter. In line, she was felled by dehydration but maintained her place with the help of a stranger who donated a chair.
She said she was about 10 people away from the warehouse door when the iBooks sold out.
I’m at a loss for words. Apparently for Mrs. Graham a price difference of $300 is the reason breaking point, after which all rational thought is extinguished in the pursuit of an offer. Did she not think that she was likely to cause more than $300 worth of damage to herself in medical bills, by staying in a situation where they’ll be physically exerted even if only by standing in line, so soon after an operation?
Overall, it’s a great example of people not understanding the hidden costs in a situation.