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The Law of Demand is a bedrock principle of economics. If the price or cost of any activity falls (or rises), consumers will engage in more (or less) of the activity if all other factors are constant. Economics teachers like Bohanon and Styring are always looking for real-world illustrations. After all, in “Wealth of Nations,” Adam Smith deftly illustrated the benefits of division-of-labor by referring to pin factories he had actually visited.
The problem with finding good Law of Demand examples is that pesky proviso “everything else equal.” The real world doesn’t serve up many of these. For example, wages for household servants have risen over the last 100 years, and fewer are hired today than in 1917. But a lot of other things have also changed (e.g., new household appliances), so it’s hard to ascribe the hiring decline exclusively to the increase in wages. However, Indiana’s byzantine liquor laws recently provided a clean textbook example—a natural experiment—of the Law of Demand.
Embattled Marsh Supermarkets decided to get out of the pharmacy business. Under Indiana law, for reasons that are shrouded in the mists of post-Prohibition evolution, a supermarket that does not sell ethical drugs cannot sell distilled beverages. Marsh, therefore, was required to dispose of its in-store liquor stock in short order.
On a Monday afternoon, the chain discreetly announced a 40 percent discount on all liquor. When Bohanon and Styring heard this news, they instinctively knew to run, not walk, to the local Marsh store. Our haste was purely in the interest of science, of course. A controlled experiment! Everything else equal except booze prices suddenly down 40 percent!
The Marsh parking lot was abnormally crowded. Entering the store and bee-lining to the serious-adult-beverage section, one saw a traffic jam of people and groaning grocery carts. Shelves that the day before had been neatly stocked with bottles of liquor were now two-thirds empty. And only a couple of hours after the announcement. (One imagines a Caracas, Venezuela, market an hour after the monthly meat ration arrives.) All the high-class stuff was gone. What was left was rapidly moving to the shopping carts. Later reports confirmed that, by early evening, only bottom-shelf swill and leftover Halloween hooch remained.
Ah, the joys of social science! Seeing theory in action. Now if our friends would just stop inviting themselves over for cocktails.•
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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.
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