Question

The following quote was taken from a letter printed in Ann Landers’s column:

Dear Ann Landers: I am a hairdresser who wishes to speak my piece. My remarks are for the women who think they are paying too much for a haircut. The reason haircuts are rather costly these days is because so many people are cutting their own hair and others wait three months between haircuts.

A)      Do you think that this hairdresser has identified the correct reason behind the rising prices of haircuts, assuming that hairdressers are in a competitive market?

B)      Explain what must be happening economically that is consistent with the facts described?

Answer 1

(A) The reasons cited are economically not correct. If people are cutting their hair themselves or waiting for a longer period in-between haircuts, the demand for haircut will decraese, shifting the demand curve leftward, which will lower the price of haircut and not increase it, ceteris paribus.

(B) The argument is valid if we withdraw the ceteris paribus assumption. Lower number of customers in hair-cutting market will make some hair-dressers exit the market which will lower market supply, shifting market supply curve leftward, increasing price and reducing number of haircuts. If the leftward shift in supply is higher in magnitude than the leftward shift in demand curve, price of haircuts will increase, as described.