Sunday, January 9, 2011

Are you a good shopper? Then why do you shop harder to find deals on things increasing in price and less so in finding even better deals on things that are decreasing in price? Which one makes you "richer"? Hmm...

At the popular econblog Marginal Revolution, there is a posting:  "Do falling prices make us complacent?".  Ever curious about human economic behavior, it prompted the following thought about the relationship between increasing and decreasing prices and our reaction to them.

""When prices rise we work harder to find bargains/sales so we can become less poor. This makes sense. There is an incentive to maintain ones current standard of living. When prices decrease we work less fervently to find even lower prices so we can become even richer (or at least better off). This makes less sense--There is an incentive to improve ones standard of living, yet in general we don't pursue it. Seems we work against our self-interest.  Is this "rational" or evidence of the irrationality of the consumer. The producer as quickly as possible increases retail prices when their costs increase, BUT when their costs decrease they are slow to decrease retail prices with the same zeal.  This makes sense from the production side. They are working in their self-interest.  The producer is certainly a rational actor in this case..."

How come on our consumption side we appear to be less efficient and not working in our own self-interest when there is motivation to do so---a higher standard of living? 

One last extra-credit attempt! Extra points on the final if you can offer a plausible explanation.  I have one concept in mind. I mention it OFTEN (as in everyday) and students don't like to hear it because it actually makes them think about making a decision...Opps--that is too much information... :)

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