David R. Henderson  

Applying the Oranges Principle to Dieting and Chocolate

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In "Freakonomics Discovers Alchian's and Allen's 'Oranges Principle,'" I laid out what we UCLA Ph.D. students learned from Alchian and Allen's famous economics textbook, University Economics. By the way, Jerry Jordan announced at the recent Association for Private Enterprise Education (APEE) meetings in Las Vegas earlier this week that the book will be reissued by Liberty Fund. It's amazingly low priced.

The gist of the principle is this:

Imagine high-quality oranges sell for $2 a pound and low-quality oranges sell for $1 a pound, all in Florida. The transportation cost to Minnesota is $0.50 per pound. The relative price of high-quality to low-quality oranges in Florida: 2/1. High-quality oranges are twice as expensive. The relative price of high-quality to low-quality oranges in Minnesota: 2.5/1.5, or 5/3. High-quality oranges are only 67% more expensive. So the ratio of high-quality oranges to low-quality oranges consumed by Minnesotans will exceed the ratio for Floridians.

See the unusually good comments in the original post for the appropriate qualifiers.

I'm applying this in my dieting. One of my main goals is to cut my intake of carbohydrates and sugar. I also, though, think on the margin. So I want to use less of those things, not zero.

I also love chocolate. So I typically have one little piece of chocolate every evening just after dinner.

But what kind of chocolate? That's where the oranges principle comes in.

Answer: High-quality chocolate.

Here's the reasoning. Now that I'm trying to cut on sugar, there's a "shadow price" on sugar content, simply due to the fact that I'm dieting, that's the same whether the chocolate is high-quality or low-quality. So add that shadow price in to both the price of high-quality chocolate and the price of low-quality chocolate. Now the ratio of the full price of high-quality chocolate to the full price of low-quality chocolate is smaller than before I was dieting. So I no longer have things like Girl Scouts cookies and what chocolate I do eat is typically Ghirardelli.


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CATEGORIES: Economic Education




COMMENTS (18 to date)
robc writes:

I was surprised no one in the last thread brought up the NASA example. When shipping costs 10k per lb, this concept becomes even clearer.

Ed Hanson writes:

Only an economist would think to justify a craving by finding something in the shadows. Admit it your in it for the taste. Or else you would be eating sugar-free chocolate (yuk).

But here is an out. If you are serious about your diet, then what you eat means something to you. If the chocolate is sugar-free the denominator is zero and is meaningless.

The word out there is 85% cacao dark chocolate.

Ed

David R Henderson writes:

@robc,
Yes.
@Ed Hanson,
I don't understand your comment. I suspect, but am not sure, that you don't understand my post.

From what I understand about the new Alchian and Allen book, it is a completely rewritten successor to University Economics and Exchange & Production. Essentially a new text rather than a reissue.

Jason writes:

I actually do the same thing, although I haven’t had a formal explanation of the rationale. Another part of my reasoning was that if the sweets (and alcohol) I eat are prohibitively expensive, I will buy and eat fewer of them.

Rob Rawlings writes:

I think there may be some "reasoning from a diet change" going on here.

The fact that dieting causes the shadow price of the sugar in a piece of chocolate to increase may explain why people tend to choose more expensive chocolate while dieting.

But I do not immediately see why knowledge of "shadow pricing" gained from a study of economics should influence one's choices while dieting in any way, any more than knowledge of the 'Oranges Principle' would cause (rather than explain) the ratio of high-quality oranges to low-quality oranges consumed by Minnesotans to change.

Ed Hanson writes:

David

I tried in a light hearted manner to point out that you allowing your bias for high quality chocolate control your economic thought. But you want things serious, ok.

First the proper universe of products to eat is not just chocolate, but all sugar containing foods. The economic measure is not your 'shadow price' but opportunity cost of what non-chocolate food you can not have due to your chocolate intake. I would bet there is a sugar containing food that is better for you out there by some measure other than love.

It is your love, read that craving, for chocolate which limited your look at opportunity cost.

But, giving you the benefit of the doubt that it is love not craving that determine your choice of chocolate, and that is the measure of opportunity cost, then we will investigate the universe of chocolate. But believing in keep it short it will be another post.

Ed

Ed Hanson writes:

David (continued)

So the universe of sugar containing food choice is limited to chocolate. You attempted to treat chocolate like your oranges, that is, there is only two kinds, high-quality and low-quality. While that is acceptable for oranges, it is not acceptable for chocolate. That is because the first measure for chocolate in your example was sugar content, which you said must be the same. But that is not true. The universe of chocolate also contains reduced sugar and no sugar chocolate. The 'shadow price' of sugar is smaller as the sugar content goes down and even reaches zero when all sugar is removed. So if it is the relative price ratio that truly rules your selection, than the no sugar option is ratio makes it the least costly option.

So admit it, you have fallen in the economist trap of letting your bias determine an economic study and outcome.

Ed

E. Harding writes:

In my experience, the best tasting chocolate is at least 90% cocoa. The less sugar, the less the terrible aftertaste.

jack pq writes:

@Ed,
Presumably DRH is not interested in ersatz chocolate.

David R Henderson writes:

@Rob Rawlings,
I think there may be some "reasoning from a diet change" going on here.
Correct. I'm dieting. Then I reason through to what that implies.
The fact that dieting causes the shadow price of the sugar in a piece of chocolate to increase may explain why people tend to choose more expensive chocolate while dieting.
Exactly. That's what my post is about.
But I do not immediately see why knowledge of "shadow pricing" gained from a study of economics should influence one's choices while dieting in any way, any more than knowledge of the 'Oranges Principle' would cause (rather than explain) the ratio of high-quality oranges to low-quality oranges consumed by Minnesotans to change.
Correct. I'm explaining my behavior. I would have behaved the same even if I had never heard of shadow prices.

David R Henderson writes:

@jack pq,
Exactly. I thought I handled this with "I also love chocolate."

Rob Rawlings writes:

Thanks for your response. I had (clearly incorrectly now I reread it in the light of your response) gathered from your "here's the reasoning" paragraph that theory was guiding rather than explaining your chocolate choices.

For the record: I rarely disagree with (but apparently sometimes misunderstand) your posts.

Ajen writes:

David -

Can you elaborate on what a shadow price is? I’ve seen that word before in several places but never saw a definition that made sense.

Adam writes:

Better tighten the constraint on proteins too. The healthiest shift away from carbs is into 'good' fats, not proteins. Without a tightened constraint on proteins, the optimal diet plan may increase protein consumption beyond what's healthy, damaging your kidneys. Best to track your BUN if your going to diet over long term.

Jason S. writes:

David - My wife is a chocolate connoisseur. She says don't bother with Ghirardelli. Equal Exchange and Endangered Species are her favorite brands. Yes, you pay extra because of the demand some people have for politically correct brands, but then again, you should expect the politically correct brands to have the highest quality precisely because they are able to engage in price discrimination.

Hazel Meade writes:

if you are dieting and cutting carbs, remember to keep your fiber content high, possibly by taking fiber supplements (i.e. psyllium husk). Otherwise you risk developing other issues like gallbladder disease. Fiber helps clean toxins out of the body which can be stored in fat cells.

Andy Guilford writes:

Alchian and Allen's famous economics textbook, University Economics, changed my life! It's a great book! Andy Guilford

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