Friday, November 14, 2008

The Indifference Principle - In Practice

The Indifference Principle is perhaps the simplest articulation of the economic way of thinking. The form I teach in class and describe in my textbook, was first described by Steven Landsburg in The Armchair Economist.

One of my former students studied the Indifference Principle in my class and then went to work as a grain merchandiser for ADM. He sent an email to an intern describing how to spot arbitrage opportunities and why those opportunities are temporary, explaining using the Indifference Principle. Below is the email he sent to his intern. Even in the workplace, understanding economic principles like the Indifference Principle is valuable.

There are a few times when we can ship meal over Chicago to the east. This happens when the supply is not where the demand is. Think of it as shopping in store, and you got to check out. You will try and find the shortest line. That is what everyone wants to do. For a short period of time there are shorter lines, but eventually they all even out. In that short period of time of shorter lines, you have the advantage. That is what happens in the meal market. There is shortage of meal in the east, western meal will flow over Chicago, but only until the markets even back out. But that small window is where we make a premium. Today I want you to find out our freight rate to Chicago (note this maybe under Chicago Prop). Then find the freight rate from Chicago Prop to Laurinburg, NC. When you have that you have the total rate from Des Moines to Laurinburg, figure the price per ton using 95 ton cars. Now look at the freight rate from Frankfort, IN to Laurinburg, NC and figure the freight rate per ton. If the meal market is -15 Z Frankfort, what does the meal market have to be FOB Des Moines for us to justify sending meal over Chicago.

Blog Archive