Ammunition Shortage - No End in Sight?

For the past few years ammunition has been in high demand. Whether this is due to gun control scares, presidential elections or conspiracy theories, people are buying more at higher prices than ever before. Ammunition supplies have been making a slow comeback. However, .22 and other high demand shells are still nowhere to be found. Relating to economics principles, we can obviously see there is higher demand than supply, driving the prices up.

There are some external motives for the increase in demand, but rationally you would expect demand to decrease as the prices soared. This is what confuses me, paying double or even triple the sticker price for a box seems undeniably ridiculous but people do it everyday. Wouldn't people have a price point where they would no longer buy the product? This may be a stretch but it reminds me of a Giffen good. A Giffen good can be described as a good that increases in demand as price increases, basically backwards of the traditional theory of demand. My thought is that people see prices increase for ammunition, they then go and buy up as much as possible before it is sold out. This occurs because there really isn't a whole lot of substitutes for ammunition. Nevertheless, a chain reaction occurs and has been for years now where some continue to buy ammo no matter the price, just to have it.

Inline with the characteristics of a Giffen good, I wonder if prices decreased substantially, people would buy less because it is seemingly more available. I recognize that this would most likely not occur but couldn't help but ponder the characteristics of an inferior good.

Do you think ammunition has characteristics of a Giffen good? What do you think is causing ammo to be in such high demand? How long will this last if it maintains Giffen good qualities?

Link that sparked my thoughts.


Cubbies said...

I think the demand for ammo is directly linked to peoples trust of the government. There is a belief that the government is buying all of the ammunition up to prevent the citizens from getting it. I have read many conspiracy theories regarding this and there is no merit to them. The one thing I have encountered as I was trying to by .22 shells to get by boy ready for and through hunters safety is people were buying them just to have. I have talked to several people that have over 20,000 rounds at home and are still standing in line to get more. I think the demand is artificially created by hoarders. This makes it very difficult for those of use that want to teach or kids to shoot and hunt. The manufactures are making enough ammo to easily cover the amount people are actually using, it is just the hoarders preventing us from getting any.

Dave Tufte said...

Jerry: 94/100 (You mean "In line" not "Inline"). Cubbies: 38/50 (peoples' not peoples, your third sentence makes little sense, you mean our not or, and manufacturers not manufactures)

I don't like the phrasing "demand is higher than supply". These are lines or curves: higher would only work as an adjective if their slopes were the same sign.

So what could be said instead? Prices are higher, but all that tells us is that demand has shifted right, supply has shifted left, or both. I think at first glance we'd say that quantity sold is down, so that's consistent with supply shifting left or up.

That's the story told casually around the country: that somehow the government has restricted the supply. But it isn't backed up. It's pretty easy to find data on the internet about the steep increase in excise tax collections from ammunition sales.

This may be one of those issues that explaining gets way beyond what we typically due in class. But let me try. Businesses can raise prices high enough to keep ammunition on the shelves. But they're choosing not to. So they must have some reason to keep it low, and keep the shelves bare. My guess is that the elasticities are such that this makes sense. But I don't know enough to make any claims about why higher prices for ammunition would drive down the purchases of other goods.

Now, Jerry does raise the possibility that this is a Giffen good. But this only make sense on the surface. For a Giffen good, you need a very strong, and inferior, income effect. And to me, it doesn't seem like ammunition has much of an income effect at all.

What this is a good example of is how expectations about the future can drive demand today. If people expect ammunition to be more expensive or scarcer in the future, they'll shift their demand to the right today. Thus, their expectations are self-fulfilling: the belief that prices will rise causes them to actually rise (and we could say the same sort of thing about quantity).

Ted said...

When school shootings, terror attacks, or other unfortunate firearm activities take place the public turns to the government for a solution.The government, eager to please the public begins reforming gun policies / laws which usually results in higher taxes and greater restrictions for guns and ammo. As a response to government policies, gun owners, enthusiasts, radicals, and hoarders rush to the stores to purchase ammunition before prices sky rocket. This is the same type of rush that grocery stores experience right before a hurricane or other storms where people rush in to buy batteries, canned goods, and water. This rush is what has shifted the demand to the right.... to the far right. In response to this, ammunition manufacturers have increased production some to 24/7 production ultimately shifting supply also to the right.

However, ammunition attracts "doomsday preppers" and hoarders who stockpile this ammunition for a rainy day. They buy ammunition from the store- up to their imposed limit- and then they send in their wife, or friends, or old enough children to buy more. When the store shelves appear empty this leads to a panic where even more ammunition is demanded. This leads to an increased rightward shift for demand. While this is not the only cause for the gap in the supply and demand, it does account for some. Until either the hoarders run out of money, or decide to taper off on their ammunition intake, it will take more time for ammunition to get back on store shelves as ammunition suppliers continue to increase their factories output.

Dave Tufte said...

Ted: 44/50 (I think you mean "skyrocket" not "sky rocket", and "factory's" rather than "factories").

I think Ted's comment is all good. This is what I meant when I wrote about "self-fulfilling" expectations in the previous paragraph.

FWIW: self-fulfilling behavior is so important in how we think about macroeconomics, that one of the most popular graduate macroeconomics texts of the last generation was called The Macroeconomics of Self-Fulfilling Prophecies.

Dave Tufte said...

In re-reading my comment, I suppose Ted may also have meant "factories'" instead of "factories".

Sebastian said...

I hadn't heard of a Giffen good before this article, it was interesting to read up on this concept. I found a study conducted by Robert Jensen and Nolan Miller that delves into this idea through a study conducted in china.
The paper discusses Giffen goods (characterized by an upward sloping demand curve) in the context of rice and wheat in two Chinese towns. Rice and wheat were considered dietary staples for the locals. The citizens acted in a utility-maximizing way, getting the most caloric content for their money. Elasticity of calories and demand depended on the level of poverty experienced by the participants. It is hard to draw a comparison to ammunition because it isn't necessarily an inferior good, but the behavior regarding the rampant purchase of ammo despite the high price is very similar to that of a Giffen good.

Dave Tufte said...

Sebastian: 50/50

Yeah. I'm glad you were exposed to a new topic.

The thing is, Giffen goods sound really intriguing on paper, but we're not sure they exist at all in the real world. Pretty much every example that people have come up with of a Giffen good has been shot down on closer examination of the data.

In part, that's why I went with the self-fulfilling expectations story. It's backed up by the data in more situations. And I definitely expectations has got to be part of any story about ammunition over the last several years.

Of course, this makes the article you found all the more interesting. That's what's called an NBER working paper. The NBER is a formal outlet for people at top schools to pre-publish longer versions of their stuff. A tightened up version of this article was published in AER (our top journal) about a year later. Google Scholar shows that it's already been cited 131 times (that's more than most SUU faculty get cited in their whole career), and I'm inclined to think a lot of that is people trying to shoot it down.