I'm sure that real economists have thought about this issue already and my thoughts are well behind formal economic teaching. But for me, it started with The Wife asking for a packet of coffee sweetener for her margarita. We observed that limes bought from Costco are just not as sweet as the ones we got from Trader Joe's the previous week. It occurred to me that we paid at least twice as much for limes at Trader Joe's as we had at Costco. But I preferred the higher-quality, higher-priced limes to the alternative, which required sweetener to overcome the sour taste.
Then it occurred to me that there were those sorts of people for whom the more sour limes were more desirable because they were less sensitive to the quality issue. They might be using the limes for something other than margaritas, they might be unaware of or indifferent to the idea that different limes have different tastes, they might be adding so much sweetener to whatever they were making that the sourness of the cheap limes didn't matter. But for whatever reason, they wanted sour limes where I wanted sweet ones.
Now, I'd been considering comparative microeconomics the previous day anyway, as a result of explaining to a client that while the myth is that drug dealers make huge amounts of money for essentially no work, the reality is that there is so much competition for retail illegal drug sales that street-level dealers have to cut their profit margins to nearly nothing. The result being that drug dealers need economic support while they attempt to ascend the ladder of their criminal organizations. In our case, that economic support was the device of pooling resources: six drug dealers in a two-bedroom apartment unable to come up with $800 a month rent, ergo, an eviction against them. So if drug dealing were all that profitable, wouldn't six dealers be able to come up with $800 between them and thus avoid having to come in contact with the law? Clients angry at their tenants resist this line of reasoning, but I can find no flaw with it.
That was why I had microeconomics on my mind as I encountered the sweet-versus-sour lime dichotomy. I mentally graphed out the matrix as I'd been taught in college, with price the vertical axis and quantity on the horizontal axis, and two curves representing supply (increasing quantity as price rises) and demand (decreasing quantity as price rises) and with the intersection of those two curves representing the maximization of the rectangular area between that and the source point of the graph as the equilibrium point. Easy stuff, any microeconomics student should be able to do that.
But this did not explain the whole phenomenon with the limes. I preferred the pricier but higher-quality limes; other preferred the less-expensive but less sweet limes. I had been taught that when one good substitutes for another, that the substitute good works on its own microeconomic matrix. But here, it wasn't a question of a similar good. This isn't comparing limes and lemons. This is comparing high-quality limes to low-quality limes.
There needs to be a third dimension to the graph, I thought. Actually, I think I said it out loud, but fortunately The Wife didn't hear me because if she had, it would have been a complete non sequitur. But the microeconomic graph representing the market for limes needs a "Z" axis, too, because sweet limes and sour limes are still within the market for limes globally, and are not really distinct goods from one another.
Presumably, the sweet limes are more desirable than the sour limes, and therefore command a higher price. Furthermore, lime merchants can be expected to know a thing or two about the quality of the goods they are bringing to market and will demand prices accordingly. I got to wondering what the curve would look like, and assumed that it would reflect a lower quantity of sweet limes as compared to sour limes, precisely because the price would increase, and because it dovetailed with my experience of seeing dozens of limes (which turned out to be sweet) available for purchase at Trader Joe's but hundreds of limes (which turned out to be sour) available for purchase at Costco.
Thinking about what the graph would describe, my assumption was it would be a cone, or at least a section of a cone. A two-dimensional cross-section "slice" of the cone taken at the price apex would represent the price for the one and only superlatively sweetest possible lime in existence, the one so sweet it tastes like candy coming right off the tree. Another "slice" would represent the price for the sourest but most plentiful limes out there, the ones used at the industrial foodservice level, for which only the tartness mattered because so much sugar would be added that the sour component of their taste was irrelevant.
But it might not necessarily be that way; it could be that most limes are sweet and command the higher price, and Costco assembles the remainders and sells them at a discount price. Experience, however, suggested that sour limes were more plentiful but cheaper, so it seemed natural to assume that sweet limes would be more scarce and that explained the price differential.
Why aren't all limes sweet? Wouldn't lime growers would prefer to sell limes that command a higher price as opposed to a lower price, all other things being equal?
In a world with a three-dimensional microeconomic matrix, however, all other things aren't equal. The market will find its equilibrium point in such a world where the intersection of the supply curve, demand curve, and quality curves maximize the amount of money to be paid for the good in question. That point might not be the point where all the goods that are available are of the highest quality. That point will be at the intersection between the arc describing where consumers find the balance between price and quality to be maximally acceptable, and the arc describing where producers find the balance between price and quantity to be maximally acceptable.
So my epiphany was that while individual consumers might prefer sweet limes to sour, the market as a whole might prefer sour limes to sweet, because that represented the efficient equilibrium point for the market. That's why my margaritas came out sour instead of sweet.
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