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Saturday, January 18, 2014

It's nice when theory and reality coincide

One of the things I have always found useful in teaching microeconomics (and particularly the intro course) is to find examples of the world mirroring the theory.  Consider, for example, the theory of demand.  One aspect of it tells us that if two goods (say beef and pork) are substitutes, then a rise in the relative price of pork should lead to an increase in the relative consumption of beef.  In the chart here I show, over time, what has happened to the relative price of pork (the average price of a pound of pork divided by the average price of a pound of beef) and to the relative consumption of beef (per capita consumption of beef divided by per capita consumption of pork).  (The correlation between relative price and relative consumption is 0.504; considering that other factors affect consumption, this is a fairly remarkable result.)

(Click to enlarge)


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