``I must give him his due. He has considerably cretinized me.'' Lautréamont

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Saturday, October 07, 2006

Roller Coaster at the Pump (NYT)

count the economic errors in this one line

1. supply equals demand

2. elasticity determines how much the price moves to regulate supply and regulate demand. If people are really reluctant to cut back when the supply is reduced, then the price moves a lot, as it has to, to get them to cut back.

3. if the demand grows faster than the ability to supply, then the price goes up so it doesn't.

4. there is no absolute ``demand.'' There's a demand at every price : the higher the price, the less the demand. There's a supply at every price : the higher the price, the greater the supply. Draw the two curves, and where they agree on a price for a quantity of gasoline, that's the supply and the demand you see.

If you can't get that right in your mind, you can't reason about anything economic.

As long as the demand for oil and gasoline grows faster than the ability to produce and refine them, the slightest shocks to supply will keep sending prices rocketing higher.


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