The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we’d expect the price of food to increase, so retailers can extract everything they can from customers.
I’m not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I’d be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.
Also also not an economist, although I took economics classes once.
I had a go at translating the simple model into one of those supply ‘n’ demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget.
That makes the status quo
and after a universal jump in income to relax everyone’s budget constraint, the non-vertical part of the demand curve rises:
At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money.
Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it’s a hole in the verbal model.
The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others’ custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.
My main reaction to that graphical model is that it would be surprising if the intersection point was currently exactly on the cusp in the demand curve, unless there was something keeping it there. To the extent that that model works, I’d expect our current situation to have a shorter vertical bit on the demand curve (there are in fact people going hungry), so that the intersection is somewhere in the slopey bit, at lower price than your first picture. Then UBI could bring us to the second picture, where the price has risen, but food is still more widely available than the status quo. (This is one of the directions I was looking at.)
With competition, it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
I guess I ruled out the possibility that the status-quo intersection was on the slopey bit because then everyone would be going hungry (from the assumptions that everyone were spending $200/month on food and that everyone shared the same subsistence level). However, I don’t have an argument for why the status quo would be on the cusp rather than below it; I just had a hunch which I should (with hindsight) probably have ignored.
Remember that retailers are in competition. If Food Lion raises it’s prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.
it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
Also consider that retailers do in fact have different prices. Instead of Sainburys raising prices, we might find Sainsburys starting to get edged out by Waitrose. (This feels sketchy to me, especially since it’s least likely to happen in poor areas, and I’m not about to argue for it specifically. But I do want to suggest that prices can rise from factors other than “retailers decide to raise prices”.)
Also not an economist.
The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we’d expect the price of food to increase, so retailers can extract everything they can from customers.
I’m not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I’d be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.
Also also not an economist, although I took economics classes once.
I had a go at translating the simple model into one of those supply ‘n’ demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget.
That makes the status quo
and after a universal jump in income to relax everyone’s budget constraint, the non-vertical part of the demand curve rises:
At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money.
Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it’s a hole in the verbal model.
The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others’ custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.
My main reaction to that graphical model is that it would be surprising if the intersection point was currently exactly on the cusp in the demand curve, unless there was something keeping it there. To the extent that that model works, I’d expect our current situation to have a shorter vertical bit on the demand curve (there are in fact people going hungry), so that the intersection is somewhere in the slopey bit, at lower price than your first picture. Then UBI could bring us to the second picture, where the price has risen, but food is still more widely available than the status quo. (This is one of the directions I was looking at.)
With competition, it seems to me that retailers currently have margins that competition could eat into, but doesn’t. If one of the factors keeping margins above epsilon is the amount of money people are willing to spend, then an increase in that would presumably also increase margins.
I guess I ruled out the possibility that the status-quo intersection was on the slopey bit because then everyone would be going hungry (from the assumptions that everyone were spending $200/month on food and that everyone shared the same subsistence level). However, I don’t have an argument for why the status quo would be on the cusp rather than below it; I just had a hunch which I should (with hindsight) probably have ignored.
Remember that retailers are in competition. If Food Lion raises it’s prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.
I addressed that below:
Also consider that retailers do in fact have different prices. Instead of Sainburys raising prices, we might find Sainsburys starting to get edged out by Waitrose. (This feels sketchy to me, especially since it’s least likely to happen in poor areas, and I’m not about to argue for it specifically. But I do want to suggest that prices can rise from factors other than “retailers decide to raise prices”.)