Methinks He Doth Demand Too Much

Milk cannot be easily found in German grocery stores in anything larger than a 1-liter carton, a mere quarter of the size on which strapping American lads like me were raised. I am consequently faced with the regular decision to either buy multiple cartons at once or make more frequent trips to the grocery store. Interestingly, I’ve found that when I buy multiple cartons I consume more milk. The reason for this is that by saving myself an extra trip to the grocery store, I’ve made the second carton cheaper to obtain. My behavior reflects the law of demand, which states that when the price of a good goes down (or up), the quantity demanded of that good goes up (or down). Funny, however, that what is so intuitive in a grocery store is nothing of the kind in other areas of life. With traffic congestion, the usual solution is not to make driving more expensive (e.g. with a toll) so drivers will do less of it, but to make it cheaper (no wasted time in traffic jams) by widening the road. Soon enough, of course, the newly-widened road is equally congested as before, just as the law of demand predicts.

Another interesting feature of my demand for milk was that as the price per carton decreased, my total spending on milk increased. In the language of economics, my demand for milk is price elastic, where elasticity is a measure of how responsive quantity demanded is to a change in price. When demand for something is price elastic, a decrease in the unit price will increase total spending on that thing, just like with my milk.

This again has interesting implications, such as with energy efficiency. Hybrid cars are becoming increasingly popular because the cost per mile of driving is cheaper due to their fuel efficiency. Empirical work has found, however, that many people respond to this decreased cost by increasing the total amount of their driving, sometimes to the point where they save no money on fuel at all. The same holds true of energy efficient appliances—many people actually consume more energy after buying energy efficient appliances in response to the cheaper costs, a price elastic response if there ever was one.

The law of demand can offer some psychological insights as well. Ask an economist how to break a bad habit, and she’ll tell you to make the bad habit more costly to indulge, perhaps through the use of a commitment device.

Since I still have no internet at my flat, blogging has become more costly for me since I moved to Schwerin. The fact that my posting has proceeded roughly apace means less producer surplus for me. I trust readers appreciate the sacrifice.