Does Economics Not Apply to Whole Foods?

It’s been a while since the last Crash Course video, and since I can admit that I have no idea what their release schedule looks like, our wait until the next video could be a few hours or a couple weeks.  In the meantime, I’ll try to keep posting about smaller points made in the videos or the progress of the site in general.

Way back in video #4 (Supply and Demand), Adriene was talking about the price of strawberries:

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The price of strawberries isn’t always $3; sometimes it goes up to $6, and at Whole Foods, local, artisanally grown strawberries, the fancy fancy strawberries, can cost upwards of $12.  But I guess Whole Foods is a whole other world where price has nothing to do with realistic economics.

I imagine that Adriene meant to say that the demand for goods at Whole Foods is generally inelastic, meaning that a small increase in the price won’t drive away that many customers.  People who shop at Whole Foods (since it’s a premium-priced grocery store) aren’t as sensitive to price increases as people who, for example, shop at Wal-Mart or Costco.  At Wal-Mart or Costco, price very much affects customer decisions, and if you increase the price of strawberries at these places, you are likely to drive away a lot more customers (in this case, the demand would be elastic).

In fact, Whole Foods is aware of this phenomenon, as in some cases, they charge more for the same good that you could find at your normal grocery store.  Still, realistic economics still do apply to Whole Foods, and there is a price point where Whole Foods will drive away too many customers to be profitable.

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A distinction that needs to be drawn is that the strawberries at Whole Foods are not the same goods as the strawberries that you find at Wal-Mart.  Fancy, organic Whole Foods strawberries cannot be put on the same graph as normal, widely-distributed strawberries because they are not interchangeable; much more cost goes into producing the Whole Foods strawberries.  People generally value the Whole Foods strawberries more than they do the other strawberries.

Conversely, a box of Froot Loops at Whole Foods is identical to the box of Froot Loops at Wal-Mart because they are produced identically, and one could not tell the difference between the two.

Economics applies to all goods and services, fancy goods included.

“The Market is Not Awesome,” Episode #4

In the first two-thirds of the fourth episode of Crash Course Economics, the hosts explained that supply and demand do the best job of sending signals to consumers and businesses on how much people want something and how much of it there is.  The hosts use the examples of strawberries and oil to communicate how these ideas work in real life.

The Fire Department


It seems like the hosts love how markets almost-magically satisfy consumer demand, but only to an extent:

So markets and supply and demand are awesome.  But sometimes, they’re not awesome.  For example, we don’t want to use the market approach when it comes to firefighters.

This is a common argument: the market is great to an extent, but there are some things that the market is not good for.  Since Crash Course came out strongly against government subsidies of businesses (and did an excellent job of explaining it, in my opinion), I was prepared to hear a thorough explanation of why we should forget what they said before, and favor a completely government-funded service instead of the market.  Instead of an explanation, Crash Course gave a doomsday characterization of what a privatized firefighting service would look like:

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9-1-1, what’s your emergency?

-My house is on fire!  How much do you charge to put it out?

It’ll be $10,000, what’s your credit card number?

-They’re all melted!

This probably goes without saying, but because of the infrequent and catastrophic nature of house fires for a household, a privatized fire department would almost certainly charge as an insurance-based system, not a pay-for-it-when-I-need-it service.  People privately purchase the same protection for medical and automotive problems (not to mention damage recovery insurance against floods and even death itself), so why not fires?

Unfortunately, Crash Course’s only argument presented was that a privatized fire department would charge too much for its service, and therefore the market wouldn’t work.  Or maybe Crash Course is arguing that business would take advantage of desperate consumers whose houses are burning and charge them an unfair price.  Besides laws voiding contracts under duress (which would likely be the case here), Crash Course would do well to remember what they argued just minutes before:

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As Crash Course argued earlier in the video, the market could certainly provide a suitable price and system for most (if not all) goods and services, fire department included.

The Organ Market

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Crash Course brings up an even bigger subject with the example of buying and selling organs, a practice that is prohibited in the United States.  This piece of the video strays a bit from economics and delves more into philosophy and morality:

What about the market for human organs?  After all, there’s a huge shortage, and thousands of people die each year waiting for transplants.  Should there be a competitive market for human kidneys?

A free marketeer would say “sure, why not?  If a donor wants $15,000 more than he wants his other kidney, why stop him?”

Well, ethics.  I mean, there are several problems that arise in an unregulated market for human kidneys.  First is the moral question: is it fair for a poor person who can’t afford a kidney to die while a rich person lives?  Well…no not at all!

Not to be the bearer of bad news, but we already live in a world where rich people survive in situations where poor people do not, including organ donations. Rich people can travel to other countries to get organ transplants, while poor and even middle class people cannot.

The question is: should more people have access to a service, even if not everyone would be able to have access to the service?  Should this only apply to organ transplants or all medical services in general?  What about in health-related areas like nutrition and safety?  Should certain goods and services be prohibited because some can afford them and others cannot?

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Another problem results in the law of supply.  When there’s an increase in the price of kidneys, there’s an incentive for people to steal and sell kidneys.

First of all, legalizing the sale of kidneys would decrease the price of kidneys, since the current price can only be found at high, black market rates.  Second, I imagine that doctors and hospitals would have some standards that would prevent someone from walking into a hospital with a bag of organs to be used for transplants.  Hospitals (and if not, governments) would be able to set the standards to prevent stolen organs from entering the legal transplant system.

Currently, you can sell your blood or plasma for money.  Is Crash Course concerned that people will steal and sell blood or plasma?

There may be a good argument against the voluntary buying and selling of organs, but I don’t think it’s in this video.  If you do have a good argument against it, please drop it in the comments.

The Supply/Demand Graph, Episode #4

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Crash Course’s explanation of Supply and Demand is pretty spot on.  Most economic schools (all but Marxism as far as I know) agree that the equilibrium price is reached where the demand and supply curves meet.  The demand curve is determined by how much money buyers would be willing to pay for a product, and the supply curve is determined by how cheap of a price sellers would sell a product.

Marxists, however, believe in the Labor Theory of Value, and would probably reject the the graph entirely.  The Labor Theory of Value states that a product’s value is determined by the amount of labor required to produce it, so if a product takes someone 1 hour to make and a different product takes 5 hours, then the second product must be more economically valuable.

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(courtesy of SMBC Comics)

Government Subsidies

Crash Course notes correctly that the concept of “fairness” or “the right price” is subjective and is not based in economics:

Some people might want to talk about a price being fair or right, but that all depends on your point of view.  The buyer always considers a low price to be a fair price, while the seller considers it unfair and vise versa.  In general economists don’t really like to push opinions about prices.  Voluntary exchange suggests that the price is there for a reason.

However, immediately after this, they input a little bit of their personal bias when they argue against government subsidies for business who are hurting because of low demand:

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For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts to the left, and the equilibrium price and quantity fall.  Farmers might go to the government for assistance, but most economists argue there is no reason to bail them out.  The market has spoken: strawberries are so over.

While I agree with their position, it’s little awkward to give a policy position immediately after saying that economists don’t like to push opinions.  As I’ve noted previously, the market sometimes shifts jobs from one industry to another, and those who argue in favor of corporate subsidies are usually ones the who are afraid of having to change jobs.

But economists are correct in saying that the government should not bail out industries, because it would do a net harm to the population generally, even if it helps a sector.  Crash Course acknowledges this when they say:

If the government helps the farmers by giving them a subsidy, it would be putting resources toward something that society doesn’t value.  That would be inefficient.

Here I do wish Adriene would have mentioned what the most efficient way to use the resources would be: by not taking it from people in the first place.  Since the market (i.e. people spending their own money freely) is the most efficient method of choosing what society wants, why do resources need to be taken from the market in the first place?