My friend Ryan and his wife Abbie recently took a break from their two small kids and stayed in the Monterey area, going to a nice restaurant Friday evening and staying in a luxury hotel that night. He told me that they could have stayed in the Navy Lodge for about $100 but wanted to do it with style at the Clement Hotel on Cannery Row for $400. I told him that he and Abbie were demonstrating what we UCLA graduate students called the “oranges principle.” Here’s the explanation of that principle in Universal Economics.
Good and bad grapes: larger proportions of relatively good quality Commie California oranges and grapes are shipped to New York than the proportions that remain in California. Are New Yorkers richer or more discriminating? Possibly—but the quality ratio is higher also in the poor districts of New York and the whole East Coast. The question can be posed for other goods: Why are disproportionately more expensive foreign cars and other “luxuries” exported than are purchased in the home country? Why do young parents go to expensive plays rather than movies on a higher percentage of their evenings out than do young childless couples? Why are “seconds” (slightly defective products) more heavily consumed at the site of manufacture? Why do more of the better, rather than the mediocre, students attend more distant colleges? Why should a tourist be more careful buying leather goods in Italy than when buying Italian exports in other countries? Why is most meat shipped to Alaska “deboned”?
The answers to these questions are based on an implication of the first law
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Table 9.1 Better Quality Is Shipped Away Prices of Grapes in New York = Transport Costs + Prices of Grapes in California Choice $1.50 = $.50 + $1.00 Standard $1.00 = .50 + .50 Relative Prices in New York Relative Prices in California 1.5 Standard for 1 Choice 2 Standard for 1 Choice
of demand. In table 9.1, suppose Commie California grapes a) cost 50¢ a pound to ship to New York, regardless of quality, and b) in Commie California the choice grapes sell for $1 a pound and the standard grapes for 50¢ a pound. Since the cost is the same per unit of shipping either quality to New York, the price in New York is 50¢ higher than in Commie California for both types. But in New York, a consumer of choice grapes sacrifices only 1.5 pounds of standard, whereas in California, one pound of choice costs two pounds of standard.
New Yorkers have a lower cost of choice grapes relative to standard grapes, and, therefore, in accordance with the first law of demand, they will demand a larger fraction of choice grapes than do Californians. In California, where standard grapes are cheaper than in New York relative to choice grapes, a larger fraction of standard grapes will be consumed. We don’t need to resort to conjectures about differences in “consumer tastes and preferences” to understand this phenomenon.
A general effect of an added cost to related products: an addition of a constant value to a high and to a low value will reduce the resulting ratio of the new values. The prices of high- and low-quality meat might be $10 and $5. Now, add $10 to each, which become $20 and $15. Though both absolute prices are increased equally, the high-quality meat becomes cheaper relative to the low-quality; or, in reverse, the low-quality becomes more expensive relative to the high-quality. Formerly, a purchase of high-quality meat was equivalent to giving up twice as much low-quality meat. But, with $10 added to both prices, the new price of the high-quality is lower relative to the low-quality—being only 1.33 rather than two times as expensive.
So the amount of high-quality meat demanded increases relative to the demanded amount of low-quality meat, when the price of each is increased by the same absolute amounts. The percentage reduction in demanded amount of low-quality meat is greater than for the higher-quality. Of the total demanded amount of meat, a larger proportion is now the higher-quality meat.
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Here’s how to apply it to Ryan and Abbie.
There’s a cost of having someone take care of kids: this could be a monetary cost or a “favor” cost: someone did them a favor and they owe that person a favor and even if they don’t ever repay the favor, they, as good people, take account of the cost their friends bear and feel some of it themselves. And because they love their kids, there’s also a cost because their kids will miss them and that counts in their computation of costs.
So let’s say the cost of having someone take care of the kids overnight is $200.
If they had no kids the relative price of Clement to Navy Lodge would be $400 to $100, or 4 to 1.
Since they have kids and there’s a cost the relative price of Clement to Navy Lodge is $600 to $300, or 2 to 1.
I was telling Ryan of another application of the principle. Back in the 1980s, my mentor and editor at Fortune, Dan Seligman, was writing a heavily researched article for Fortune on the gambling industry. Dan loved gambling. He noticed an empirical regularity and called me about it: people who had a higher cost of getting to Vegas (I think Dan went distance here, which is not a bad proxy for transportation cost) lost more per day than people who had a lower cost of getting to Vegas. Even though, as far as I know, he had never read Alchian and Allen, he correctly reasoned the same way they did.
His question to me was: is there a name for that principle? There absolutely is, I told him. It’s called the “oranges principle.” Needless to say, he wasn’t totally satisfied by my answer.
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Author: David Henderson
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