I am posting a e-mail which sugests a way to curb inflation. It is a good lesson to know that why inflation happens, how can we as a consumer control it by controlling our consumption pattern, how corporates take advantage of inflation and get stuck if they don’t exit at right time. I hope it will be a good lesson to learn. Here goes the story…
As the man kept buying eggs the price kept going up. He saw the big egg trucks delivering 100 dozen eggs each day. Nothing changed there. He checked out the huge egg farms and found they were selling 100,000 dozen eggs to the distributors daily. Nothing had changed but the price of eggs.
Then week before Diwali the price of eggs shot up to Rs. 40 a dozen. Again he asked the grocery owner why and was told, “Cakes and baking for the holiday”. The huge egg farmers know there will be a lot of baking going on and more eggs will be used. Hence, the price of eggs goes up. Expect the same thing at Christmas and other times when family cooking, baking, etc. happen.
This pattern continues until the price of eggs is Rs. 60 a dozen. The man says, “There must be something we can do about the price of eggs”.
He starts talking to all the people in his town and they decide to stop buying eggs. This didn’t work because everyone needed eggs.
Finally, the man suggested only buying what you need. He ate 2 eggs a day. On the way home from work he would stop at the grocery and buy two eggs. Everyone in town started buying 2 or 3 eggs a day.
The grocery store owner began complaining that he had too many eggs in his cooler. He told the distributor that he didn’t need any eggs.
Maybe wouldn’t need any all week.
The distributor had eggs piling up at his warehouse. He told the huge egg farms that he didn’t have any room for eggs would not need any for at least two weeks.
At the egg farm, the chickens just kept on laying eggs. To relieve the pressure, the huge egg farm told the distributor that they could buy the eggs at a lower price.
The distributor said, ” I don’t have the room for the %$&^*&% eggs even if they were free”. The distributor told the grocery store owner that he would lower the price of the eggs if the store would start buying
again.
The grocery store owner said, “I don’t have room for more eggs. The customers are only buying 2 or 3 eggs at a time. Now if you were to drop the price of eggs back down to the original price, the customers
would start buying by the dozen again”.
The distributors sent that proposal to the huge egg farmers but the egg farmers liked the price they were getting for their eggs but, those chickens just kept on laying. Finally, the egg farmers lowered the
price of their eggs. But only a few paisa.
The customers still bought 2 or 3 eggs at a time. They said, “when the price of eggs gets down to where it was before, we will start buying by the dozen.”
Slowly the price of eggs started dropping. The distributors had to slash their prices to make room for the eggs coming from the egg farmers.
The egg farmers cut their prices because the distributors wouldn’t buy at a higher price than they were selling eggs for. Anyway, they had full warehouses and wouldn’t need eggs for quite a while.
And those chickens kept on laying.
Eventually, the egg farmers cut their prices because they were throwing away eggs they couldn’t sell.
The distributors started buying again because the eggs were priced to where the stores could afford to sell them at the lower price.
And the customers starting buying by the dozen again.
Now, transpose this analogy to the gasoline industry.
What if everyone only bought Rs 200.00 worth of Petrol each time they pulled to the pump? The dealer’s tanks would stay semi full all the time. The dealers wouldn’t have room for the gas coming from the huge tanks. The tank farms wouldn’t have room for the petrol coming from the refining plants. And the refining plants wouldn’t have room for the oil being off loaded from the huge tankers coming from the oil fiends.
Just Rs. 200.00 each time you buy gas. Don’t fill up the tank of your car. You may have to stop for gas twice a week, but the price should come down.
Think about it.
Also, don’t buy anything else at the fuel station; don’t give them any more of your hard earned money than what you spend on gas, until the prices come down…”
..just think of this concept for a while.
- 
Rajeev Damani 
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October 19th, 2008 at 4:31 pm
hi
the article is food for thought.
the way you explained inflation with the help of eggs is amazing.
actually the inconvinience caused due to be in line for gas at the stations is major concern that they go for full tank.
sir can i have a conversation wiyh you.
my id ginny.1987@gmail.com
October 19th, 2008 at 5:32 pm
Okie
October 20th, 2008 at 11:21 am
Good one Rajeev. had seen this earlier too..I think this time concept will stay. Thanks
October 20th, 2008 at 12:20 pm
Another way to look at it.
Say the population of the town is 100. Each person requires 2 dozen eggs a week.
Scenario 1: On an average, everyday, the trader sells the eggs to 14 people (100/7) or sells 14.25 x 2dozen eggs everyday, i.e, 28 dozen eggs(342 eggs to be precise).
Scenario 2: If all the 100 people buy 3.5 eggs a day (average- 24/7). The total number of eggs sold per day would be 350.
Therefore, in both the scenarios, the purchase by the trader would remain the same as his sales to are the same in both the cases. The only difference is that, he was selling higher volumes to less number of people and is not selling lower volumes to higher number of people. The distributor has got no reason to decrease his production or the price as he is literally unaware of the market condition, which has no impact at all.
What say?
Awaiting a contradictory perspective to this. Is this theory incorrect?
October 20th, 2008 at 4:51 pm
hey Pratik,
the concept quoted by rajeev is not anything you gone follow forever. What I think, its a concept to be applied for a short time to recheck the price rise from the manufacturer side. What you calculated is correct, but take a scenario which have very short span. Retailers buys goods in bulk and break the bulk and sell and thus made profit on single unit. Retailers generally do “forecasting and anticipation” and keep inventory in stock. But if a customer starts buying less then its previous basket size, retailers forecasting calculation will go wrong and he will left with lots of inventory in stock and will defer any further purchases, which will decrease the demand of that product and will ultimatly forces manufacturer to reduce price of that procuct as he can’t reduce the production because of “economy of scale” otherwise he will bear losses. Thus in this short period of less demand from the retailer’s side, manufacturer will be forced to drop the prices till the retailer’s stock get over. Now you can again increase you basket size or can go with your present basket size it won’t make a lot of difference as your calculation shows.
October 21st, 2008 at 11:12 am
Interesting chicken & egg story
What’s the moral here?
May be it’s a good idea to stick to kiranas, who definitely buy fractional volumes compared to the big-wigs?
However, this also supports the view held by many Indian politicos (opposing entry of organised retail in their respective states)!
Agreed that “conspicuous consumption”, made unfamous by Manmohanji last year, does help the traders laugh all the way to the bank. Does the flip side affects us all?
Mind going tick tick tick….
October 21st, 2008 at 4:00 pm
Two things:
1. scenario “might” work in short term for perishable goods …but then their are always alt. uses of the same products like the biscuit/cake/shampoo(as if they actually use eggs lol) industry might buy bigger qty’s from the distributors to take advantage of lowered prices
2. for goods like gasoline..nobody wants to block the money but there’s something called tradeoff b/w convenience and blocked capital..already good pumps have queues during rush hours..if we all start getting fuel needed for that day..similar to CNG ( for diff reasons though)…we’ll all see long queues…so not too sure..
long back there was a fwd mail that if we decide to have a consumer strike for fuel for a day..that might force oil companies to re-look at their prices..but my understanding says that even that won’tr work…
October 21st, 2008 at 4:01 pm
Hey Sen,
I guess your interpretation of the story in retail perspective is slightly wrong. The big-wig retail giants doing bulk buying in comparision to kiranas are actually bringing down the cost, and thats what politicians are raising as issue. As per them, they are killing these kirana ppl. But in story with bulk buying, they are increasing the price. Egg is an example but it is main for products for which demand is high and substitutes are less (like gas). Real Estate can be an example.