I found it.
The deal of a lifetime!
Yesterday, on Gumtree, a man from Mortdale NSW, known simply as Matt, had posted an extraordinary offer. He was selling a 24-pack of Quilton ‘poo tickets’ — his words, not mine — for $550,000.
Yup, a little over half a million dollars for a few rolls of toilet paper…
Don’t worry though, this stuff is worth it. As Matt noted in his brief description:
‘Not opened no risk of corona with this paper this is a quality Australian product. I’m not sure if corona gives you the runs but after a couple of 6packs I get a headache.’
Ah, it’s good to see that even a viral outbreak can’t quash the Australian sense of humour.
Though I wish I could tell you that this whole TP fiasco was one big joke.
Sadly, that’s not the case.
In case you haven’t heard yet, people are stocking up big time on toilet paper. My local supermarkets have all been cleaned out, that’s for sure.
Now some people are no doubt doing this as a precaution. They’re stocking up just in case the virus gets worse.
I can get that, even if I personally think it’s an overreaction.
However, what is more troubling is the scalpers. People who are trying to make a quick buck by buying up toilet paper and reselling it at a higher price. The kind of people Matt is lampooning.
Seriously, just check for yourself. Gumtree, eBay, and Amazon are now filled with ridiculous toilet paper offers. Asking for disgusting amounts of money because of the local shortage.
Now I hope no one is desperate enough to fall for this price gouging. But, when panic sets in, you’ve got to be prepared for some irrational behaviour.
Demand, elasticity, and extremes
The beauty of all this TP hysteria is that it is a great reminder, a reminder of why economic theory and reality are often starkly different.
See, Economics 101 always starts with the law of demand. That is, that the purchase of a given good has an inverse relation with the price of said good.
Or, in simpler terms: A higher price should lead to less demand, and a lower price should lead to more demand.
Beyond this simple ‘law’ though, is some nuance. After all, demand and price are not equal across all goods.
There is obviously going to be more demand for toilet paper than a Ferrari, for instance. After all, one is a cheap necessity, while the other is an expensive luxury.
Because of this, the way these goods react to price changes is very different.
A 10% price rise on a $5 pack of toilet paper for instance wouldn’t dent demand all that much. A few people might make a fuss, but most (if not all) would pay the extra 50 cents for TP.
In contrast, a 10% rise in the price of a Ferrari would be far more impactful. The 2019 Ferrari Portofino, for example, starts at $449,498 for the base model. A 10% increase would mean forking out an additional $44,950. A hefty sum of cash, which might deter someone from buying their dream car.
These are both examples of price elasticity. A measure of the change in demand relative to a change in price.
In our examples, toilet paper would be classified as (almost) perfectly inelastic. Meaning demand isn’t likely to change much even if prices go up or down.
The Ferrari though, is relatively elastic. Meaning demand is likely to change if prices go up or down.
Hopefully you can see the logic to these two theories. They’re pretty simple to grasp and are a big part of wider economics.
There is one slight problem though, both these theories are ‘classical’. And that means they assume that the people responsible for demand, like you and me, are rational.
As the empty shelves of toilet paper show us, that’s not always the case…
Price gouging isn’t the only oddity
My point is, hysteria is distorting economics. Which is why I wouldn’t be surprised if people are actually falling prey to the TP price gougers.
If someone is genuinely scared, then price could be irrelevant in their mind. $550,000 is obviously too extreme (God, I hope so anyway).
But $15 or $20 for a few rolls? I could see a desperate individual succumbing to the panic at that price.
In the US, one senator is already up in arms about price gouging on Amazon. Urging the company to do more to combat this unscrupulous behaviour.
Here’s the thing though, price gouging doesn’t exist in a vacuum. As US economist Don Boudreaux noted back in 2017:
‘If in the wake of natural disasters government penalizes merchants for exchanging goods and services at unusually high prices voluntarily paid by customers, that same government should also penalize consumers for exchanging goods and services at unusually low prices voluntarily accepted by merchants.
‘And in both cases the self-important government officials can go on television and radio and denounce the “greed” that, in their economically uninformed opinions, “cause” these prices to differ greatly from these prices’ pre-natural-disaster levels.’
I realise this quote is pretty dense, but it is articulating the opposite of price gouging. The often-overlooked side of economics that occurs in the wake of a disaster, when consumers can often buy goods for considerably cheaper prices.
Now, Roger is arguing it should be a punishable practice. I get his point, but I doubt any government would actually commit to that.
Which is why you should take advantage of it. Just like the TP scalpers are trying to take advantage of us.
How you ask? With cheap stocks of course!
Rationality is dead
See just like toilet paper and Ferraris, stocks also have price elasticity. Price changes will affect demand. And more importantly, just like regular markets — perhaps even more so — there is a serious lack of rationality at times.
Right now, we’re seeing this reverse price gouging in stock markets. Companies that have been forced into a position where they are undervalued.
There are bargain stocks out there right now. You’ve just got to look for solid companies that have been oversold. Easier said than done, I know.
But hey, if $550,000 toilet paper sounds laughable, you’d be surprised at what you can find at the other end of the spectrum.
After all, there’s a serious lack of rationality out there right now.
Editor, Money Weekend
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.