The Economics of Control

What to Do

In this demo you play the role of a rich or a poor person buying meat and bread to control caloric intake. When you click on the "RichMan" or "PoorMan" button you will see a graph with the X axis labeled "Amount of Bread" and the Y axis labeled "Amount of Meat". Move the cursor "shopping" arrow to the origin of the graph to start purchasing meat and bread by moving the arrow away from the origin. Meat purchases are indicated by the height of the red meat line. Bread purchases are indicated by the horizontal position of the blue bread line.

The vertical position of the unfilled horizontal calorie bar on the right side of the graph indicates your caloric intake level, going up or down as purchases of meat and/or bread increase or decrease, respectively. Your aim is to purchase enough meat and bread to meet your caloric needs, indicated by the space between the two filled horizontal bars on the right of the graph; when the calorie level bar is approximately centered between these filled horizontal bars your caloric needs are met.

It is relatively easy to meet your caloric needs if you don't care about the relative amounts of meat and bread purchased. The demo becomes interesting, however, when you try to meet your caloric needs through the purchase of as much meat as possible (if you are a vegetarian you can still do the demo by thinking of the meat as eggplant parmesan).

Start the demo in the role of a "Rich Man". Start trying to meet you caloric requirement by purchasing as much meat as possible (make the red meat purchase line go as high on the Y axis as possible). If you try to buy too much meat, however, you will exceed your budget limits. When this happens you will find that the red meat purchase line will go no higher; you can't buy any more meat because you have no more money. When this happens, move the "shopping" arrow to the intersection of the purchase lines and try to reduce the amount of meat and increase the amount of bread purchased (move the arrow so that the blue bread purchase line move to the right).

Once your meat and bread purchases have approximately centered the calorie intake bar between the two filled horizontal "caloric needs" bars, press the mouse button to end a trial. The graph will clear and you can start shopping again (by moving the shopping arrow to the origin of the graph), but with the price of bread increased.

At the end of four trials you will see a graph of the data showing the caloric intake level on each trial (open dots that should all be at the same level) and the amount of bread purchased (filled squares) as a function of the price of bread. The latter is a "demand curve" showing changes in purchases of (demand for) bread as a function of the price of bread. The shape of this demand curve will be very different for the "RichMan" and "PoorMan" if you have tried hard to purchase as much meat as possible on every trial.

A paper describing an attempt to empirically confirm the existence of the Giffen Effect in the real world cam be found here.

What To Notice

Notice that the Giffen effect (increase in demand for bread with increase in the price of bread) only happens when you have a very limited budget (when you are a "PoorMan"). Notice also that the effect occurs only when you can satisfy a need (caloric intake) with both an expensive (meat) and a less expensive (bread) commodity. If you were a "breaditarian" and wanted only bread to satisfy your caloric intake requirement, the Giffen effect would not occur in this situation.

What Works Best

The demo works best if you start each trial by trying to purchase as much meat as you can. If the amount of meat purchased doesn't meet the caloric intake requirement then lower the meat purchase slightly and try to meet the requirement with an increased purchase of bread. This way you are always buying as much meat as your budget will permit while allowing you to satisfy you caloric intake needs with added purchases of bread.