Here’s a great story about the importance of getting an education in both Art and Economics: ArtNet News – New York Times Exposes Peter Lik Photography Scheme. Give it a read before reading the rest of this post.

There’s a lot of interesting Microeconomic applications of this story. Lik makes 995 prints of a photograph, sells them for cheap at first, but as they become more “scarce” the price rises. If the prints were, in fact, becoming “scarcer” then there might be a justification for their prices rising, and it is this illusion of increasing scarcity that tricks his (apparently un-art-educated and un-economics-educated) buyers into being willing to pay a much higher price for the final few prints than was paid for the first several prints sold.

In fact, the prints don’t become scarcer as more are sold, rather, the quantity supplied remains constant at 995. In most markets, to sell additional units of a product, the price typically has to decrease (since those who are willing to pay the most will buy first), but in the market for Lik’s photographs, those willing to pay most are the LAST buyers of the good. He has managed to reverse the rationale behind consumer behavior by creating an artificial sense of increasing scarcity, and thereby tricking his buyers into believing they are investing in an asset that increases in value over time rather purchasing a good that only loses value once it leaves the gallery.

Assuming demand for a particular print is fixed in a period of time, there really should be a single price as long as the quantity supplied does not change (which it doesn’t!!). But by making his buyers think the scarcity is increasing (by implying that the more are sold, the fewer the there are available to buy), demand actually rises as more prints are sold and the the price correspondingly increases. There is no actual change in the quantity supplied, only demand, and the reason demand is increasing is the belief that the rising price signals increasing scarcity, thus the ability to sell the art for an even higher price in the future. Art can be an investment, like gold, which people demand more of when the price is rising, because of the anticipation of future price increases (and thus the ability to make a profit on the purchase and future sale of the asset). As it turns out, the secondary market for Lik’s prints is tiny and few buyers have ever turned a profit on their purchase of a Lik print.

The fact that the prints’ prices are rising is evidence only of Lik’s monopolistic, price-making power, not a real increase in the market value of a Peter Lik print. Lik himself reveals this ruse when he says about his art, “”It’s like a Mercedes-Benz, you drive it off the lot, it loses half its value.”

The moral of this story: If you don’t study both ART and ECONOMICS in school, never pretend to be a skilled art collector, because you’re only being tricked by scam artists (and savvy businessmen!) like Peter Lik!

Swine flu fear leads to shortage of garlic in China – Telegraph.

My colleague this morning happened to ask if I had heard about the garlic bubble in China. A quick news search led me to the story:

Garlic prices have increased fifteen fold in China in under a year because Chinese investors are said to be attempting to create an artificial shortage and drive up prices.

Chefs and housewives in some cities are struggling to get hold of one of the nation’s favourite ingredients, which has passed gold and oil to become the China’s best-performing asset.

Several factors have led to the “garlic bubble” in China. Firstly, low prices of garlic last year:

Falling garlic prices last year have contributed to the shortage with many farmers discouraged from planting the crop again…

To compound the problem, supplies of garlic have been further reduced due to speculation. Yes, speculators are hoarding warehouses full of garlic to drive price up in the face of rising demand. Chinese believe that garlic has medicinal properties and is therefore a remedy for swine flu. This year’s unusually high level of demand is attributable to the flu epidemic and Chinese desire to consume more garlic to fend off the illness.

The result of all these combined factors is illustrated below. The low prices in 2008 led to farmers to cut back on production, reducing supply to S2009normal. What the farmers did not predict, however, is the rise in demand due to swine flu. The reduced supply is exacerbated by speculators buying up output and warehousing it, shifting supply further left to S2009w/speculation.

As can be seen, prices have risen, but shortages persist. It should be expected, therefore, that prices will continue to rise until the shortages are eliminated. On the other hand, the speculators may begin to release their hoarded supplies, shifting supply outward and restoring equilibrium closer to the current price.

A third possibility is that the swine flu epidemic will subside and demand will return to a normal level. This, of course, would spell doom for speculators who put millions of RMB into garlic who would then find themselves with “assets” that had lost their value. This would mean the proverbial “bursting of the bubble”. This final possibility seems unlikely anytime soon, for among the Chinese, traditional beliefs run deep, and with the lack of widespread access to a swine flu vaccine, garlic will likely remain the remedy of choice for the country’s masses.