Sunday, June 14, 2009
Matt and I have had a four year argument that I want to settle right now. Matt contends that a consumer is NOT constrained to the demand curve. My argument, which still might be ineffective, goes like this. Suppose that 10 billion shoe laces are sold at $1 in a perfectly competitive market. Now Matt goes to school in high-top basketball shoes and kids tease him. Matt desperately wants shoe strings so he goes to the Dollar Store and buys a pair of shoe strings for $50. Has Matt changed equilibrium? NO. Let's look at the margin.
There are now 10,000,000,001 transactions for a total market value of $10,000,000,050. If I divide total market value by transactions, the average amount paid for shoe laces is $1.000000005. Matt's transaction has not changed equilibrium. I conclude that Matt indeed was not constrained by the demand curve, but is irrational behavior didn't materially effect the market. Matt will go back to school and still be the object of teasing.