Freakonomic’s Steven Dunbar has an interesting post positing why its cheaper to  buy a kiwi from New Zealand than to mail a letter there.  This is particularly weird concept if you consider that fruit is always more technically challenging to ship due to packaging requirements and damage concerns.

I suggest that maybe we should attach our letters to fruit to bring down the mailing costs!

Dunbar also asks why a kiwi, banana and apple cost about the same, even though the apple is coming from much closer (probably upstate New York) and banana’s are pretty robust to ship.  So Dunbar posits the question to Will Masters, an agricultural economist at Purdue.  The answer, of course, is about supply and demand but Masters’ reply is a must read even if you already think you know the economics…

Damn supply and damn demand:
Why cheap hogs and costly ham?
Bargain wheat, expensive flour,
The oldest villain’s market power.

Just one seller makes us nervous,
Like that U.S. Postal Service:
They may offer bargain prices,
But who disciplines their vices?

Middlemen have long been blamed
For every market that’s inflamed,
Yet better explanations come
From many a Hyde Park alum.

Modern views from Chicago-Booth
Give a nuanced view of truth,
Steven Levitt and John List
Made each of us a freakonomist.

We let data speak its mind
No matter what Friedman opined
And find the price of fruit and veg
To be driven by the market’s edge.

Like the tail that wags the dog,
Marginal thinking clears the fog:
Sellers, buyers, traders too,
Interact and prices ensue.

A kiwi costs 33 cents
Simply because no one prevents
Another farm or New York store
From entering and selling more.

In contrast apples may be dear,
For reasons that will soon be clear:
Picking them’s below our station,
To lower costs we need migration.

Bananas have a different story,
Seedless magic, breeder’s glory,
Cheap to harvest and to ship,
Who cares if workers get paid zip?

Each crop’s method of production,
Where it grows and how it’s trucked in,
Satisfies some needs quite cheaply
While other costs will rise more steeply.

A buyer’s choices matter too,
For nonsense stuff like posh shampoo,
Prices are not down to earth,
The more you pay the more it’s worth.

Behavior is as behavior does,
Maybe some things are “just because,”
Much of life’s a mystery,
A habit due to history.

For prices, though, it’s competition
Plus tariffs set by politicians,
That determines whether we see
Such delightfully cheap kiwi.

This entry was posted on Thursday, June 4th, 2009 at 1:04 pm and is filed under economics., link out. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.