Friday, September 22, 2006

Things that drive econ professors batty

From ElectEcon:

Did the High Price Reduce the Demand for Oil?

We struggle, year in and year out, to teach our students the difference between a change in demand versus a change in the quantity demanded, and we are undercut at every turn by people who say things like the following:
[I]t is becoming clear that the laws of economics still apply to the world oil market. High prices should reduce demand and encourage new investment in supply capacity, and we can see that happening.
The above quote is from Steve Polos, writing about oil markets.

High prices did NOT cause a reduction in demand, though. What happened was that time passed. The short-run demand curve for oil is steeper than the long-run demand curve. It is now and it was a year ago. All that has happened on the demand side of the market is that we are now seeing those longer-run effects, namely a much larger reduction in the quantity demanded in response to higher prices. the short-run demand curve has shifted, but that is in response to the passage of time.

The rest of Steve's piece is interesting and good analysis about other influences on both supply and demand; too bad it confuses a change in demand with a change in the quantity demanded


Anonymous ted said...

Here's a link that your other readers unfamiliar with the concepts of demand and supply might be interested to visit.

12:41 PM  

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