When Hanging Out in A Bar Teaches a Lesson in Supply Side (Micro)Economics!!!!

Soo...I go out tonight to a local bar.  I have several drinks and I'm having a good time.  The drinks are reasonably priced.

Out of nowhere, I notice a bottle of Wild Turkey 101 sitting on the shelf.

Keep in mind: I haven't paid more than $1.50 for any drink to this point.

I ask the bartender: "How much for a shot of Wild Turkey 101?"

Bartender: "$4.50"

Cahnman: "Eh, no thanks."

All of a sudden, the thought hits me: I would TOTALLY buy that shot (and probably still be at the bar instead of coming home and blogging this incident) if they were charging $2.50.

Then it hits me: Supply side economics has repercussions in daily (microeconomic) life.

For those of you who went to public school, let me explain: Price Signals REALLY matter!!!

Given the price of the Wild Turkey 101 shot(s), I chose to come home and blog about the fact that Wild Turkey 101 shots are prohibitively expensive instead of staying at the bar and drinking Wild Turkey 101.

The bar had the opportunity to, quite literally, take another thirty dollars of my money had they NOT overcharged for Wild Turkey 101.  Instead, I'm back home blogging about supply-side (micro)economic incentives.

What does this mean for national economic policy?  It means we should make good things (like Wild Turkey shots) as cheap as possible.

In the words of Rick Santelli: "President Obama, ARE YOU LISTENING?!?"

I hope this helps.

That is all.

Cahnman out.

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Comments

Duh . . .

n/t

You've completely misunderstood "price signals"

That bottle is sitting there on display, with its little "101" on the label and its $4.50 per shot price tag, to convince you that it is a premium brand. The company can make more money by charging more and selling less than it can producing in volume. About 20 years back  Famous Grouse became the top whiskey in Japan becasue its producers RAISED the price.

What does this mean for national economic policy?  It means we should make good things (like Wild Turkey shots) as cheap as possible.

Sometimes, companies don't want their products to be sold "as cheap as possible". You are exhibiting a central planning mentality. Shall I shout "SOCIALIST!!!!!" at you?

sure. fine. it's already happened, you know.

last time we had a great depression.

luxuries were cheap as hell, because nobody could afford them.

and necessitties were dear, and cost way way too much.

 

welcome to the next depression -- glad you'll enjoy living in your car with your kids.

Not nearly as good as your last bar story.

Last time we all went to a bar with you, you almost got laid, but could not bring yourself to praise President Obama for the nice young lady. So we know you are not a man who is willing to pay a considerable price to enjoy the finer things in life.

But you still don't quite get that Wild Turkey 101 is in a sense no more costly than the lowest rot gut whiskey in the joint. Let's say the bar charges a 500% markup on all products. They don't actually do this of course, or every drink would be a different price. Bars group drinks in four or five tiers of price, which should average out such that each tier is on average a 500% markup. Some drinks in the tier will be less than 500% and others will be more.

But all the tiers represent the same target markup whether they are top shelf or bottom. In fact it is highly likely that the worse drinks in the house represent the worst value and the premium liquors are a real bargain. Let's say a bottle of rotgut costs the bar $10 and a bottle of Wild Turkey 101 costs $20. Those are not at all unreasonable assumptions for prices. There are about 16 shots in each. So the bar has a cost of 62.5 cents per shot invested in the cheap stuff and $1.25 in the Wild Turkey 101.

You were asked to pay $4.50 for a drink that costs them $1.25 which is a 360% markup. That means to make the same percentage selling the cheap stuff they would have to sell it at $2.25 per shot. I haven't seen drinks that cheap in many a year. I'll bet they were charging closer to $3.50 for the stuff you were drinking. That would be a 560% markup. Even if it was $3.00 drink happy hour, the rotgut at 480% markup is still a much worse value than the WT 101.

Plus people might drink the WT 101 straight up. So it is unlikely the bar would try to water it down, as it would taste different. The cheaper liquors are almost always mixed with something, so a bar might easily try to water the bottles down to get 20 shots per bottle. That would make a low end drink sold at $3.50 an astonishing 700% markup. Nearly double the rate of the $4.50 WT 101. The key would be to order the most costly liquor sold at the $4.50 price point. A liquor with a cost of $35.00 per bottle would only be about a 200% markup. That's less than half price in a sense.

So what have we learned? Next time, tell the poor girl that Barack is going to be a fantastic President and shoplift that pootie my man!