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H2 Econs [Demand & Supply] The Irrationally(?) High Prices of Chinese New Year Goodies

February 1, 2019

 

 

 Is it rational to pay for exorbitant Chinese New Year goodies that you can eat all year round?

 

You have seen those Bak Kwa (traditional Chinese BBQ Pork) queues in Chinatown haven't you? Snaking queues that look as if Apple were launching new iPhones! (We will talk about that madness another time). Think about it; you could eat Bak Kwa all year round, why do people pay higher prices and spend time queuing just to get it during Chines New Year? Is this even rational? 

 

 

1.   Higher and More Inelastic Demand = Higher Prices

 

During Chinese New Year, traditional goodies such as Bak Kwa are seen as indispensable. This preference to have traditional foodstuff to host family and friends, drive demand to the highest in the entire year. At the same time, the perceived indispensability makes the demand curve highly price inelastic. As demand rises and become more inelastic, it is inevitable that there would be a significant increase in prices. What about the queues? Well in reality, prices do not adjust to the equilibrium levels that easily. Remember that before prices rise, there is a temporary shortage that leads to consumers bidding higher prices for the scarce good. For so long as the shortage exists, non-price rationing sets in and manifests as queues.  

 

2.   Don't Forget Supply!

 

Bak Kwa and many other Chinese Goodies are best consumed freshly made, or within a couple of weeks of being made. These food tend not to have much preservatives (unlike traditional snacks like chips and biscuits), and thus are slightly more perishable and difficult to make in advance and stored in anticipation of sales. This makes the supply curve relatively price inelastic as well. Put this together with the rising and increasingly price inelastic demand, you have the perfect combination of factors that drive higher prices. 

 

3.   Is it Rational to Pay Higher Prices during Chinese New Year? 

 

In the spirit of Asian prudence, it is easy to criticize "silly" people for queuing and paying sky high prices for Bak Kwa or pineapple tarts at the Takashimaya food fair. But as far as rationality goes, as long as consumers maximize their utility and consumer surplus, the outcome is great for them. Consider this: when demand rises, the perceived marginal benefit of consuming goods and services actually goes up (since D=MB). This is logical, since consumers would not be willing and able to pay higher prices for the same quantity of goods and services otherwise. Thus the new equilibrium would still maximize consumer surplus, as consumers would take reference from the new demand curve. Besides, how do we really quantify the joy of getting together with friends and family and enjoying some great traditional Chinese goodies? Priceless. 

 

4. Conclusion

 

Chinese New Year; the best time of the year for Chinese families all around the world. Why spoil the mood with Economics? I'll spare you the conclusion this time. Happy Chinese New Year! Huat Ah! 

 

 

 

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