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What My Students Have Been Learning, Chicken Wings Edition…

February 1st, 2013 · 5 Comments
Econ 101

One thing that is suboptimal about teaching Principles of Microeconomics rather than a more specialized course is that the “what my students have been learning” anecdotes seem a bit simplistic to me. That said, this one took a bit of a funny turn, so I thought I would share. (Also, those of you who teach can use the example with your students.)

So I was trying to think of relevant and not too boring comparative statics (really just a fancy way to say “analyzing changes in supply and demand”) scenarios to use with my students when I came upon the following from The Consumerist:

Super Bowl Partiers Lament: Last Year’s Drought Is This Year’s Uptick In Chicken Wing Prices

According to the U.S. Department of Agriculture (via NBC News) chicken prices were up 6% in December, which is more than triple how much overall food prices rose in a year. Yikes.

This isn’t a huge surprise, as during last summer’s drought experts warned that meats and dairy would probably cost more as the feed needed to sustain animals was in short supply.

If it costs more to feed the chickens, it’s going to cost more to eat them. But in the case of chicken wings there are other factors pushing up the price, says one economist who spoke with NBC, including a glut of chickens last year.

Farmers subsequently cut down on how many they raised, which means fewer chickens around for me (and fine, you) to eat.

So this actually gives us a nice chain of comparative statics to think about. First, there’s the impact of the drought on the market for chicken feed. The bad weather reduces the amount of feed that farmers can make out of a given amount of inputs, so the drought raises the costs of producing chicken feed and reduces the amount that farmers want to produce at any given price. In other words, this:

The increase in price happens because otherwise there would be a shortage of chicken feed (i.e. more demand than supply) and market forces operate to bid up prices until the shortage goes away. (Anyone who has ever used StubHub for concert or sports tickets knows roughly how this process works.)

But wait, there’s more…the increase in the price of chicken feed raises the price of (quite literally) an input to making chickens. When the prices of the stuff used to make a good increases, it’s less attractive to produce that good (since costs increase) and producers don’t want to make as much of it. So we see similar behavior in the market for chicken wings to what we saw in the market for chicken feed:

Therefore, it’s not surprising that this drought issue in and of itself raises the price of chicken wings, but, for those of you who pay attention to the outside world, there may be another factor that is compounding the price increase. I don’t know if you’ve noticed, but this sunday is Superbowl Sunday, and, from what I’ve heard, chicken wings and sport ball games are economic complements (i.e. people tend to consume them together). Therefore, the demand for chicken wings likely increases in the days running up to Superbowl Sunday, which could drive up prices even more:

Notice that, in this case, I said “could” rather than “will.” The reason is that, in practice, producers are often times hesitant to raise prices in the face of increases in demand (even when not doing so would cause a shortage) because consumers tend to see the practice as unfair and get upset, making the short-term increase in profit potentially not worth it in the long run. Instead, producers are probably more likely to anticipate the demand increase around Superbowl Sunday and hole back some of their output at other times so that they can get more chicken wings into the stores for the big game. (Notice that this practice would essentially raise prices for non-superbowl times, but people don’t appear to complain about that.)

So these are the typical economic incentives that get discussed when talking about supply and demand, whether it be the supply and demand of chicken wings or anything else. What I didn’t think to discuss initially was the impact that prices have on the incentives for those who operate in illegitimate markets (i.e. criminals). Again, from The Consumerist:

Pair Arrested For Stealing $65K Worth Of Tyson Chicken Wings

According to the Atlanta Journal-Constitution, the two men were both employed at the storage company when 10 pallets — $65,000 worth — of Tyson chicken wings went missing on Jan. 12. This was before the Atlanta Falcons were eliminated from the playoffs, so perhaps the men were hoping they could cash in if the hometown team made the Super Bowl? Police say the alleged thieves used a forklift to put their purloined party snacks into the back of a rented truck.

The whereabouts of the wings are unknown.

I suppose that economics would suggest that an increase in price also makes stealing a good and trying to resell it more attractive. Again, as an exercise in economic complements, I would start looking for the wings in wherever I might find a bunch of stolen refrigerators.

Tags: Econ 101

5 responses so far ↓

  • 1 Faza (TCM) // Feb 2, 2013 at 9:01 am

    I don’t know about “simplistic”… this is actually a very interesting case, one that not only allows you to demonstrate simple “rational agent” economics, but actually provides a spring-board for getting into the “human factor”.

    I especially like the “speculative” element that emerges when we consider the issue of price increases (or lack of same) around Superbowl.

    As you point out, we might anticipate a scenario where increased seasonal demand would cause a corresponding price increase – which is staved off by suppliers choosing to keep prices constant, possibly by reducing supply in the preceding period. The question that immediately pops into my mind is: did this hoarding of chicken wings for the SB contribute to the increased prices (and if so, how much)?

    My thinking is that, cost of inputs aside, reduced supply and a corresponding price increase could lead to increased profits (if the price hike happened to exceed the actual unit cost increases and the reduction in sales did not lead to reduced revenues). That’s the first trick.

    The second trick is that come Superbowl the punters will be buying wings at the new, higher price. There may be no SB-related hike, but chicken wings will nevertheless be priced higher than they would have been, had suppliers not chosen to hoard them for the big weekend. The increased demand at a fixed price will be sufficient to raise revenues (and profits), provided it can be met by suppliers (which was the main purpose of the hoarding).

    In the best case scenario, the suppliers might find themselves enjoying increased profits both prior to and during Superbowl weekend – despite increased input costs – and still manage not to upset their customers (if they can be convinced that the price increases are the result of external factors – such as the drought).

    The Great Wing Robbery can be used to illustrate anticipated risk v. pay-off calculations in the economic decision-making process, without going all political (since, quite frankly, we’ve no shortage of recent examples that would, nevertheless, lead us down potentially contentious paths).

  • 2 What My Students Have Been Learning, Chicken Wings Edition… « Keep These Memories Close // Feb 5, 2013 at 10:46 pm

    [...] See on http://www.economistsdoitwithmodels.com [...]

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