Friday, June 13, 2008

Zakaria Fails Econ 101 on Demand v. Quantity Demanded

Fareed Zakaria from CNN:
More important, high prices are finally making Americans use less gas.
...
If we use less, the price will come down.
Consumers reduce their quantity demanded because of the price increase, but the subsequent reduction in quantity demanded will not lead to a decrease in price by itself. This is a mandatory question on all first econ 101 exams. The logic itself is circular: prices rise --> consumers reduce quantity demanded --> if this causes prices fall wouldn't the next step then be increased quantity demanded and higher prices?

Econ principles teachers of the world, weep.

4 comments:

Anonymous said...

Some people Can't cut down on using fuel. I own my own business (my wife and I are the only employees) and we use our 3/4 ton diesel truck to pull our cement trailer to jobs ( our only source of income). We use approx. $200.00/week worth of $4.69 per gallon diesel. So what are we supposed to do? Pull a 14,000 pound trailer with a bicycle? Let's send $10 Billion more dollars in foreign aid somewhere! How about using that "borrowed" money to bail out OUR country first?

Matt E. Ryan said...

1) If gas were $50,000 per gallon, would you still consume the same amount?

2) Given the choice between $10 billion in aid here or $10 billion in aid elsewhere, am I selfish in saying that I'd rather it hurt other countries before it hurt ours? Foreign aid is bad, but at least it's foreign. Go America! Obviously, the best choice is to keep the money in the hands of those who earned it in the first place, but that's not the decision at hand here.

William Luther said...

"More important, high prices are finally making Americans use less gas.
...
If we use less, the price will come down."

If the "..." went something like If using less (1) encourages technological advancements allowing consumers to use less gas per mile [thus shifting demand leftward] and/or (2) encourages technological advancements allowing producers to produce gas cheaper [thus shifting supply rightward] or (3) some combination of the two, the price of gas will come down.

But I am guessing that was not the case. In any sense, you would need some curve shifting and price changes don't do that in and of themselves.

What do you think?

Justin M Ross said...

W. Luther, here was the "...":

"Despite increased demand from China and India, it is still America that is the biggest consumer. Americans consume 23 million barrels of oil a day, compared with 2 million barrels per day for Indians."

You are right, the price change in and of itself does not shift demand. However, rising prices are encouraging actors in the marketplace to discover alternatives that did not previously exist. This certainly will lower demand and prices.