The Simple Economics of Discrimination

Diversity is a topic that comes up quite frequently, whether having debates on affirmative action policies or hate crimes against a particular marginalized group in society. I'm surprised when working in higher education when the topic of diversity does not come up. It could just be me, but I get the perception that the voices I usually hear  are the loud voices of those who feel there is too much government interference on hiring minority candidates and those who feel that American Society is still as racist as it was in the Early 1900's. 

Considering the diversity conversations usually get brought up by the confronting fringes of society, I wanted to bring this topic more down to earth and explore the economics behind discrimination. This article will take a micro-economic approach that views the production of a business firm selling a good or service to consumers. The one assumption to this analysis is that discrimination of a producer leads to a direct or indirect action. It then also leads to them not selling to a consumer or indirectly influencing the consumer not to buy that good or service on the basis of feeling discriminated against. 

Pretend you are an owner of a mid-sized grocery store that is located in a mostly Caucasian neighborhood, but also has a noticeable group of African Americans and Latinos in the area. Down the road, there is also a gay bar. being realistic, people do not see "white only" signs anymore or business owners that bluntly kick anyone out due to their backgrounds. However, there are times where people show visible signs of being uncomfortable with a minority cultural group whether intentional or not (microaggressions). In this particular example: If the grocery store owner is prejudice against gay people and has had limited interaction with other racial groups, these minority groups will go elsewhere for their grocery needs and give negative publicity online via social media and review sites about the business. This means less products being purchased in the store and less revenue for the owner. 

Below is a short run supply and demand curve that shows when a business owner engages in discriminatory behavior with marginalized/minority consumers. The demand curve (slanting left to right) shifts to the left because the owner has a change in the consumer base, excluding the marginalized groups. The supply curve (slanting right to left) does not change because the production does not change in the short run. As you can see, Q1 goes to Q2 showing a decrease while there is also a decrease in price from P1 to P2. Although the price drop is good for the loyal consumers in the short run, it stagnates the growth of the owner's business and  decreases its comparative advantage to the business' competitors. (more text below graph).

With this analysis, one could come to an economic and realistic understanding why it is important not to discriminate against marginalized/minority groups. If one looks at it in more of a macro-level perspective, one could argue that the economy can be hindered by discriminatory activity. Especially if a big portion of private or public sector engages in such activity.