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Home Market Research Economy

The Second Law of Demand and Supply in Action

by TheAdviserMagazine
7 months ago
in Economy
Reading Time: 2 mins read
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The Second Law of Demand and Supply in Action
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It’s no surprise egg prices are soaring.  In October 2024, UMASS – Amherst economist Isabella Weber argued that price controls are needed to keep prices under control and, further, that the controls would not have the negative effects we usually predict, such as shortages, deadweight loss, etc.  I responded to her claims here.  One of the points I raised was:

Furthermore, since the price being kept artificially low disincentivizes the supply curve from becoming elastic and/or growing, the costs of price ceilings persist longer than they would otherwise.

Four months later, we see this in action.  The high prices of eggs are causing people to consider turning to backyard chicken coops or even renting chickens.  This is an example of the Second Law of Demand: “Elasticities of demand with respect to price are greater the longer the time after a price change” (Universal Economics by Armen Alchian and William Allen, p 116).  In other words, the longer prices remain relatively high, the more people will search out or develop substitutes, making the demand curve more elastic.  The same holds true for supply: the longer prices remain relatively high, the more creative people will be to bring supply to the market.  When eggs were $0.99 a dozen, it made little sense to have a backyard chicken coop, which has start up costs of thousands of dollars.  But, with egg prices pushing the double-digits (a dozen large eggs are selling for $9 at my local store), now the relative price of backyard coops has fallen and people are turning to that alternative.  The demand for eggs is becoming more elastic.  Same with supply, as we see people with coops selling or giving eggs to their neighbors.

With price controls in place, this process would be much harder.  The market is moving toward a solution.  Price controls would have slowed this process.  Rather than ending shortages and controlling inflation, Weber’s proposal would have just turned the visible costs invisible.  

Update: The price of eggs has fallen since I originally wrote this piece.  The price of a dozen eggs at my local store is now (as of 3 April) $5.79.  However, I will not change the original post because the drop supports the point I am making here.



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