Using Uber to Pass Economics

Learning economics is a difficult undertaking for students like myself. Unlike biology or mathematics, economics is not tangible or easy to visualize. Even its definition–the study of scarcity–leaves me puzzled about the nature of economics as a field of study.

However, Uber, a global ridehailing service, is an economics student’s saving grace. Uber’s market is an ideal for what we want the economy to look like. It has characteristics of a competitive market: low barriers for entry, many buyers and sellers, and somewhat homogenous services. Most importantly, the prices riders pay are a direct response to supply and demand. Uber is an excellent example with which to apply numerous economic terms and theories.

Take, for example, consumer surplus. According to Britannica, consumer surplus is “the difference between the price a consumer pays for an item, and the price he would be willing to pay rather than do without it.” It’s a number that has been impossible to estimate in the real world (unless you are a fan of the Infinite Universe theory) until now. Steven Levitt, an economist at the University of Chicago, was able to estimate a consumer surplus measurement using Uber’s data, which collects information about completed trips and those that were considered (user opened the app) but never taken.

On Freakonomics’ podcast from September 7, 2016, Levitt explains that even though Uber has an algorithm to come up with the ideal prices of surged rides, the company instead only multiplies the cost by tenths (1.1, 1.2, 1.3) for customer convenience. This series of minute discontinuities allows for the estimation of the price-sensitivity of Uber riders.

Now, what is price sensitivity? In Greg Ip’s The Undercover Economist, he explains the concept: “when I raise the price, how much do my sales fall? And when I cut the price, how much do my sales rise?” So, it’s the extent to which the price of something affects if a person will buy it.

Levitt examined Uber’s database, of many similar consumers facing incrementally different prices to examine the price sensitivity of the riders (at what price will they leave the app instead of booking a ride). Levitt also used this data to estimate Uber’s consumer surplus. He extrapolated that in 2015, the consumer surplus in the United States was $7 Billion, which means that riders were willing to spend $11 Billion on rides, but in reality only paid $4 Billion.

The “Regression Discontinuity Analysis” that Levitt used to estimate consumer surplus can also be used to illustrate a real-life example of the demand curve. Britannica explains that the Demand Curve is a graph illustrating the relationship between price and quantity. The curve slopes downward from left to right because price and quantity are inversely related. It’s an artificial construct that economists use to examine real-world situations. But once again, Uber can be of assistance. Uber’s price surging data, all of the small jumps in price faced by similar consumers, can be added together to discover an instantaneous demand curve. When there is no surge, the price of rides is average and so is the amount of drivers. As an oversimplification it can be noted that demand is at equilibrium. When surges occur, prices go up and and the amount of drivers available declines, so demand is high.

Uber has been in the news a hundred times over for all of its scandals and controversies. But Uber deserves more positive press–it led me to pass my econ quiz!

 

 

 

 

Your Economy Is What You Eat

Within the United States’ precarious political environment, many Americans live in fear that the economy will dip into a deep recession like that of the housing crisis, which occurred not even a decade ago. These nerves are rational, as our market economy is cyclical. Periods of growth have always inevitably been met with periods of recession.

Economic indicators can help us to analyze the economy. Studying trends in retail sales, unemployment, etc. can help us make educated guesses as to where the economy is and where it is going. An interesting economic indicator we can use to analyze these trends is restaurant sales.

In an economy with contracting growth, individuals and families may feel their first inklings of strain in terms of food. In an unhealthy economy, the dollar might be devalued and workers may be laid off, which would lead to a decrease in consumption, which accounts for almost two thirds of the U.S.’s GDP. Consumption measures what is spent on goods and services produced in the United States. Even though it is only a portion of a nation’s GDP, consumption can be used to help predict the future of an economy, especially in a country like America because its consumption is relatively high in comparison with other economic variables.

If an economy is shrinking, one of the first areas of decline is restaurant sales. Economically strained Americans first tighten their finances by refraining from eating out. Food as a commodity is a short-lived luxury, since after you eat it, it’s gone for good. Therefore, food, especially going out to eat, is one of the first areas in which people start to cut back when trying to save money. Declining restaurant sales are an indicator that economic growth is slowing.

Within slowing or flat restaurant sales reports is a hierarchy. The first types of restaurants to feel decreases in sales are full-service, sit-down restaurants. They’re the first to go for individuals trying to save because they are the most draining of important resources, e.g. time and money. Next comes fast casual restaurants, whose sales’ declines mean that there is much more financial strain amongst a nation’s citizens, leading financial experts to turn decidedly bearish on them. Decisions like these lead to less valuable restaurant stocks.

However, not all trends in restaurant sales decline when Americans are nervous about the economy. An example of an outlier is pizza. As Bloomberg reports, in June of 2016, restaurant sales were flat, the lowest growth in sales since 2013. In contrast, Domino’s continued growing, with sales toping 5% for Q2 2014 – Q2 2016. Bloomberg Intelligence Analyst Michael Halen explains that Pizza does well in recessions due to its value proposition–moneymakers feel frugal spending $7.99 on a large pizza to feed their families.

Many other aspects of food can be economic indicators. Increases in grocery store sales indicate that more people are eating in and thus trying to save money. And similar to pizza shops, fast-food chains tend to do well during recession due to consumers’ value propositions. Hugo Lindgren of New York magazine went so far as to publish the “Hot Waitress Economic Index” explaining that during slow, flat, or declining economic growth, restaurant servers are more attractive, assuming that attractive people tend to find higher-paying work during good economic times.

Economic indicators are measurements collected to assist in hypothesizing the future of the economy. They are useful only with supportive data and examined in long-term contexts. Some indicators are estimated by governmental organizations or professional private companies. However, some are more suitable for normal citizens, like pizza.

Other sources: Eater Wall Street Journal Forbes