Frozen Yogurt stores are everywhere in my neighborhood.  YoBerry, Berry Moon, Yogurtland, Forever Yogurt, Red Mango — the list goes on.  This is somewhat of a peculiar trend on the surface, but there several reasonable explanations for why it might be taking place.

The large number of yogurt stores in my neighborhood is likely due to a high demand for the product.  People in my neighborhood love frozen yogurt, so there is room for plenty of stores in the area.  Assuming it is a perfectly competitive market, new frozen yogurt firms will continue to enter the market until supply reaches demand.  Since demand seems to be relatively high, there are a correspondingly high number of frozen yogurt stores.

But why is demand so high for frozen yogurt?  One reason is because of a great product design.  At frozen yogurt stores, people get to make their own yogurt creation.  The stores are self-serve, meaning that customers pick the exact quantity, flavor, and assortment of toppings.  Everyone that comes to these stores has ideal combinations of quantity, flavor, and toppings they would like to choose.  This can be seen as their indifference curves for frozen yogurt.  Each point on their indifference curve represents some combination of quantity, flavor and, toppings that they are equally happy with.  If the yogurt stores had preset menus, customers might be forced to pick a combination that does not fall on their indifference curve and would not maximize their utility.  However, at these yogurt stores, customers are able to purchase one of their ideal combinations and maximize their utility.  Frozen yogurt stores in my neighborhood are popular in part because a great product design allows people to pick what makes them happiest.

Another reason for the high demand of frozen yogurt is a change in consumer preference during the summer months.  Frozen yogurt stores are especially popular when it gets warm out and people want a cold, refreshing snack. Though the stores are popular year round, there is an especially high demand for them in the summer.

In addition to high demand, business owners also open a lot of frozen yogurt stores in my neighborhood because they are able to charge high prices and a make profit.  My neighborhood is made up of an affluent population who can afford to pay a relatively large amount for frozen yogurt.  As a result, the stores are able to charge a pretty high price for yogurt — usually about 5 or 6 dollars per cup — without a dramatic decrease in demand. This suggests that the price elasticity for yogurt in my neighborhood is relatively low.  If, however, these yogurt stores tried to charge 5 or 6 dollars for their product in a poorer neighborhood, they likely would not see the same results. Yogurt is a luxury good, not a necessity, so people running low on a money would probably not be willing to a pay a high price for this product.  In this scenario, the price elasticity for frozen yogurt is higher.  Fortunately for the owners of frozen yogurt stores, there are neighborhoods like mine where they can charge high prices for yogurt without seeing a dramatic decrease in demand.  This allows them to make more of a profit and increase their total revenue.

On the whole, there appear to be numerous reasons why there are so many frozen yogurt stores in my neighborhood.  The demand for these stores is high due to great product design and a change in preference during summer months.  Moreover, business owners have the incentive to open frozen yogurt stores because they can charge high prices and make a profit.  The number of frozen yogurt stores in my neighborhood may seem odd at first, but there rational economic explanations for why there are so many of them.

I am a big Chicago Bulls fan, so I was very excited when I  saw the headline for the article “Kevin Love likes Warriors, Bulls.” The article describes how Kevin Love, star basketball player for the Minnesota Timberwolves, has no intention to re-sign with the team when his contract expires after next season.  The Timberwolves have been pretty mediocre for Love’s entire career there and it seems he is ready to move on to a winning team.

I think one explanation for Kevin Love’s desire to move teams is the diminishing marginal utility of playing for the Timberwolves.  When Love first came to the Timberwolves as a rookie he was probably excited to the join the team.  He was paid a lot of money, had thousands of fans cheering for him at home games, and got to work with a new set of talented teammates and head coaches.  However, over time it seems that Love has lost interest in playing for the Timberwolves.  It is no longer as fun to step out onto the court when you have already done so with the same team for multiple seasons.  Though there is some degree of variation from game to game — a buzzer beating win is more fun than a 20 point blowout loss — on the whole Kevin Love is getting less and less utility out of playing for the Timberwolves.

Another relevant economic idea is Kevin Love’s opportunity cost of playing for the Timberwolves.  Kevin love wants to win, and every season he spends on a losing team in Minnesota is one he could be spending on a good team like the Bulls.  There are not very many explicit costs for NBA players simply because they are paid so much money and live a luxurious lifestyle.   Implicit costs, like missing out on the opportunity to play for a better team, tend to be the most important costs for NBA players.

The Timberwolves do not want to lose Love, but as the article mentions, the smartest idea might be to trade him.  They would be better off trading him — even for less valuable players — than letting  him go after next season and getting nothing in return.  This is similar to the economic idea of unexploited gains from trade.   If Kevin Love signs with another team, the Timberwolves will be losing out on profits they could have made by trading.

My friends and I recently discovered a shocking price change on the menu at the Tavern of Northfield.  The breakfast special had been raised from $4 to $4.75.  On the track team, going to the Tavern is sort of a ritual.  Members on the team go almost every week and they always order the same thing — the breakfast special.  The meal comes with two eggs, bacon, and a side of toast, which people on the team unanimously agree is a pretty good bargain.  So, after hearing about the price change I immediately wondered if we would still go to the tavern as often to buy the breakfast special.  Put in economic terms, what is our price elasticity for this meal?

One important consideration is the other substitutes for the breakfast special available in Northfield.   As far as I know, there are no other restaurants in town that offer the high quality breakfast food that the tavern does.  Restaurants like Chapati and Hogan Brothers are good, but they are not really substitutes for a breakfast meal because they serve and indian food and hoagies.  Tandem Bagels comes closer to being a substitute, considering that some enjoy eating bagels for breakfast and could potentially pick it over the tavern.  Yet, it is still does not offer the same traditional breakfast meal — bacon, eggs, and toast — that the tavern does.  Moreover, Tandem Bagels is relatively more expensive to start with, so it seems unlikely that a price increase of 75 cents at the tavern would cause someone to choose Tandem bagels instead.

Ultimately, I think it is unlikely that the price increase at the tavern will cause the track team to go there any less.  Going there has become a tradition and the dining experience is somewhat irreplaceable.  Even though it’s kind of goofy, team members have a special attachment to the restaurant and the breakfast special.   As a result, their price elasticity for the meal is relatively low.

More broadly, this example sheds light on how tradition can affect price elasticity.  As is the case with the track team and the breakfast special, there are some things that have people weird and irrational affinities for and are unlikely to give it up if they have to pay more.  I wonder to what extent firms consider the idea tradition in their decisions on pricing.