Theory of Price - exceptions that prove the rule

 Perhaps you're starting to look at supply and demand, the start point of the theory of price in Economics. A good way to test your understanding might be to look at a few oddball examples which seem to fly in the face of the theory. In the title of this blog I'm using the phrase 'to prove the rule' to mean to test the theory. See what you think...

My first example comes from an article by James Surowiecki in The New Yorker, which I came across in The Week magazine (well worth a regular read). It highlighted the case of lobster prices in restaurants:

"From oil to wheat to beef, commodity have shot up in price over recent years. But there is one glaring exception: lobster. In 2005, Maine lobster sold for $13 a kilo wholesale. Now, thanks to a series of bumper harvests, Maine lobstermen get less than $5 a kilo. Yet even as lobster prices have collapsed at the docks and in supermarkets, they remain as high as ever in restaurants. There’s more lobster out there right now than anyone knows what to do with, but we’re still paying for it as if it were a delicacy. Why?

Because lobster, despite everything, is still seen as a luxury. And because of that high end image, its price involves a host of odd psychological factors. Research has shown, for instance, that when restaurants sell lobster cheap, it makes customers suspicious and undermines their enjoyment of it. Restaurants also keep lobster prices high to make other menu items look cheaper by comparison – a highly effective marketing trick. When it comes to lobsters, it seems, we diners are suckers."

This example highlights a psychological aspect to price that we all recognise.

The Economist wonders what makes a great artist, and thinks the answer is something of a puzzle. One thing is sure, great art can be copied – we know this because of all the excellent fakes in circulation. Glafira Rosales, an art dealer in New York has just admitted that she has, over the past 15 years, fooled two local commercial art galleries into buying 63 forged works of art for more than $30m. She is being forced to give the money back, and is still awaiting sentence.

No-one doubts that Ms Rosales is guilty of a fraud. But – according to The Economist - although art forgers do a certain amount of economic damage, they also provide public entertainment by exposing the real values that lie at the heart of the art market. The art market pretends that great artists cannot be copied, and this justifies the often absurd prices their work commands. If the purchasers of great art were buying paintings only for their beauty, they would be content to display fine fakes on their walls. The fury and embarrassment caused by the exposure of a forger suggests this is not so.

Expensive pictures are primarily what economists call positional goods—things that are valuable largely because other people can’t have them. The painting on the wall, or the sculpture in the garden, is intended to say as much about its owner’s bank balance as about his taste. With most goods, a higher price reduces demand. But art, sports cars and fine wine turn the theory of price upside down.