Please think for a moment of a chicken sandwich. It could have two slices of wheat bread, tomato, lettuce, onions, cheese, pickles, mayonnaise…and chicken. Deciding to make his own sandwich from scratch, a man named Andy took six months and spent approximately $1500.
Where are we going? To why prices help us make a chicken sandwich.
How Andy Made the Sandwich
Andy grew some of his ingredients in a community garden. The lettuce, tomatoes, wheat, peppers–anything he could grow himself, he planted.
Because the pickles just needed cucumbers dill, garlic and salt, his garden had what he needed except for the salt. That took a trip to the Pacific coast where he got two gallons of ocean water that, after more than four hours of boiling, left him with two cups of salt. The next challenge was getting through airport security during the trip home. Assuming his salt was contraband, they arrested him.
You can pretty much imagine what it took to get the other ingredients. For the mayo, Andy created his own oil from sunflower seeds and went to a farm for eggs, milk and to kill the chicken. The bread? You get the picture.
Below is a YouTube trailer but I do recommend the 10 episodes. Only several minutes long, each segment shows how Andy created one ingredient.
Our Bottom Line: Prices
As economists, we should take Andy’s story a step further.
The ingredients are all available at a local supermarket. But why? Why are people from anywhere in the world willing to cooperate so we can make a chicken sandwich? The answer is price. During every step of the production process, someone, combining land, labor, and capital, decided that he or she would be willing to exchange a good or a service for a certain price. Those people did not need to know or even like each other. But they cooperated so that our local supermarket got the ingredients.
So, we could say that a chicken sandwich exists because of the incentives that prices create. Economists call the interaction of prices and incentives the price system.