The Second Law of Demand and Supply in Action

As egg prices continue their upward trajectory, the need for intervention is becoming increasingly apparent. Back in October 2024, economist Isabella Weber from UMASS – Amherst made a compelling case for the implementation of price controls to stabilize these soaring costs. She contended that such measures would not yield the typical negative outcomes—like shortages or deadweight losses—that economists often warn about. I took the opportunity to respond to her assertions here. One key point I raised was:

Moreover, maintaining artificially low prices disincentivizes the supply curve from becoming elastic or expanding, meaning that the repercussions of price ceilings tend to linger longer than anticipated.

Fast forward four months, and we are witnessing this theory materialize in real-time. The escalating prices of eggs have prompted many to explore alternatives such as backyard chicken coops or even the novel idea of renting chickens. This phenomenon exemplifies the Second Law of Demand: “Elasticities of demand with respect to price are greater the longer the time after a price change” (Universal Economics by Armen Alchian and William Allen, p 116). Simply put, the longer egg prices remain elevated, the more consumers will seek out or innovate substitutes, resulting in a more elastic demand curve. The same logic applies to supply: when prices stay high, it incentivizes creativity in bringing more products to market. When eggs were merely $0.99 a dozen, the thought of investing in a backyard chicken coop—often with initial costs reaching into the thousands—seemed impractical. But with prices now nearing double digits (my local store lists a dozen large eggs for $9), suddenly, the cost-benefit analysis shifts, and backyard coops start to look more appealing. Consequently, demand for eggs is becoming more elastic, and we also see a rise in neighbors trading eggs from their coops.

If price controls were imposed, this adaptive process would face significant hurdles. The market is naturally gravitating toward solutions, and price controls would merely stifle this evolution. Instead of alleviating shortages and taming inflation, Weber’s approach would cloak the real costs, rendering them invisible.

Update: Since I penned this commentary, egg prices have indeed decreased. As of April 3, a dozen eggs at my local store now costs $5.79. I won’t amend the original post, though, as this drop reinforces the argument I’ve laid out here.