Basic Economics – Explained In Simple Terms

As a person who considers Pizza his favorite food, this simple example used to explain basic economics particularly appealed to me.

For me, nothing – nothing – in recent years has confirmed my faith in the wonders of markets and competition more than one humble little sector of our economy: the pizza industry.

I’m a pizza addict. Ten years ago, I would have to part with the best part of twenty bucks to get one large pizza delivered. Suppliers in my area were limited and it sometimes arrived cold. When in Sydney a few years ago – in an area not well serviced by the Pizza men – I shelled out nearly fifty bucks for two delivered pizzas + a drink. Nowdays, I can get two large pizzas – easily enough to feed three people – for less than $15. It arrives quickly, is great quality, and there are a far greater variety of pizzas to choose from.

So in ten years, pizza prices have more than halved, the quality has gone up, the delivery times are quicker, and there’s a greater menu to choose from. And it’s 100% the result of competition. As a couple more suppliers moved into the area, the “coupon wars” began. Maybe a couple of coupons per month would arrive in the mail, offering a few bucks off per pizza. Then other companies started to price-match. Nowdays, my letterbox is flooded with pizza coupons, each subsequent one outmatching the last.

Not only have prices for delivered pizzas more than halved, but “pick-up” pizzas went through a fascinating descent in prices: Dominos would have pick-up pizzas for $7.95 each, then Pizza Haven would offer the same for $6.95, and so on, until we are now being offered a fantastic meal for what seem to be “loss leading” prices: $3.95 for a large pizza. That’s a meal for two people for less than the price of a sandwich at many places. The suppliers seem to figure that you’ll buy drinks or side orders while you’re there, which is where they’ll make their money. At the very least, they’ve given you a $3.95 pick-up sampler of a pizza you’ll pay more to have delivered.

Now that prices for the wonderful pizzas can’t seem to drop much further, I’ve noticed something else: none of the suppliers seem to care if you actually possess the coupon or not. My girlfriend and I are still ordering pizzas from coupons that expired months ago. Nor have any of the delivery boys asked us to produce said little pieces of paper.

You can imagine the sort of horrified reactions these consumer-benefiting, price-dumping practices would evoke from the ACCC, the Australian Democrats and other pro-regulation freaks if pizzas were say, airline tickets, books or petrol. Why, we’d have whinging about “anti-competitive behaviour”, government legislation and all sorts of craziness. Oh, wait a minute….

There is a final point worth noting: while local “fast food” pizza suppliers are offering ridiculously cheap food, it doesn’t seem to have had any detrimental effect on the “gourmet” pizza market in Canberra at all. There are more places than ever where – for a premium – you can have a sit-down meal of a “real” pizza containing the finest ingredients available.

Remarkable isn’t it? If the whinging wisdom from the Australian book industry were applied here, we would be seeing the death of gourmet pizza outlets, and in turn see the fleecing of pizza consumers as the evil “big business” dial-a-pizza suppliers jack up prices and lower quality. Instead, the dial-a-pizza market is prospering with more suppliers, higher-quality products and lower prices, while the “gourmet pizza” sector has succeeded superbly by adapting themselves to a niche not served by the dial-a-pizza chains.

The consumer wins. Big business wins. Small business wins. Amazing what can be achieved when the government keeps its paws off our pizza.

All of this could be broken down even further, to one simple principle:

My entire interest in and understanding of economics exists at a far more basic, everyday level. In my left-leaning early twenties, I started to wonder – for example – if I wanted to go grocery shopping at 4am, why a supermarket shouldn’t be allowed to stay open at 4am to sell them to me. I came to realise that being able to spend my money how and when I want was simple common sense, as I could never get a sensible explanation from anyone as to why it was a good idea to curb my spending with regulations. More importantly, if I were free to spend more of my money how I wanted, then there would be more people who would compete for my dollar, offering me incentives via both price and product to choose their goods over the goods of others.

Link Via Professor of Political Science Michael Munger.

2 Responses to “Basic Economics – Explained In Simple Terms”

  1. Scott says:

    This pizza example is a brilliant example of the “invisible hand” theory of economics. Well stated – almost as clearly as the “no free lunch” econ 101 lesson I got from my friend as a freshman in college. (That’s a real compliment, by the way.)

    And this support for laissez-faire competition driven economics works great in a non-essential industry like delivery pizza (or any pizza, for that matter.) Add any level of the complexity, however, that comes “essential” industries (like healthcare or agriculture) or monopolized & pseudeo-monopolized industries (like energy, software licensing, petroleum, etc.). The simple “hands off” unregulatory approach falls short in these circumstances. The invisible hand becomes handcuffed – invisibly, of course, making it all the more difficult to discern and identify, but no less felt in its impact.

  2. The complexity is only added in essential industries by the government, not by anything inherent in the industry. Remove the government factor, and I don’t see how essential industries will respond any differently than non-essential industries to the “invisible hand” of laisesez-faire economics.

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