Wednesday, March 09, 2005

Supply & Demand. Econ 101.

Way too often I read tracts on economic issues where the author does not understand the fundamentals of economic forces. Supply and demand are the fundamental economic forces that guide what is available and at what cost.

With the recent rise of gasoline prices it is going to be become painfully obvious the ignorance of many people. What is supply and what is demand? They are two separate concepts that dance together to establish the cost of an item.

Supply is the amount of of a given good a producer is willing to produce at a given price. Note it is price dependent. Demand is the amount of a given good consumers are willing to buy at a given price.

Now let us use gasoline as the given good. One common complaint is that there is always plenty of gas, that is that gasoline is not a scarce item and therefore when a supplier uses low supplies to justify high prices they are being deceitful. This is missing half of the picture.

You see consumers never act independently of an item's price. When the price of gas increases we all look for ways to drive less, we look into driving more fuel efficient cars, the idea of carpooling becomes more palatable etc etc etc. That is the demand drops to mee the lower supply of gasoline available.

Think back to the 70s when we had two oil embargoes targeting the USA for its support of Israel. The left's arch-demon imposed price controls on gasoline. What was the result of that? Long lines, rationing, and drivers not being able to find gas stations with gas to sell them. That is the demand for gasoline exceeded the supply and as a result we had to know if the number on our license plate was odd or even, or we could only buy between five and ten gallons etc.

The only time in recent memory where I had to wait in a line to get gas was on September 11th 2001. People were afraid gasoline prices would spike as a result of the unfolding situation. As a result people were bringing in all of their cars and gas cans to fill up in anticipation of higher gas prices. Some gas stations increased their prices to meet the increased demand and people still were paying $3.00/gallon on that day. At the time they thought they were getting a steal but as it became apparent gas prices would remain stable they screamed that they were ripped off and gouged. What malarkey. Gas stations were faced with an incredible demand on their product that day and did what anyone else would do, they raised their prices to take advantage of the demand (which would dampen the demand and make sure they had product for everyone willing to pay that price).

Shamefully the State of Wisconsin punished those gas stations that increased their prices that day.

Now with gasoline the actual item being demanded is energy. With the increase in prices for energy it becomes easier and easier for people to justify purchasing more expensive and energy efficient devices. With that increasing price it becomes easier to justify risky research into alternative energy sources.