An Econ Lesson for a CNN Reporter

I turned on CNN Headline news this morning (Saturday) and watched an item on gas prices.  The reporter, who's name I did not catch toed the party line by going after the greedy oilmen.  But then he tried to use economic reasoning to make his point.  To explain the rocketing gas prices, he said:

"A short supply increases demand...."

In other words, the existence of a shortage shifts out the demand curve.  The fella could use some brushing up on his Principles of Econ, brushing up which I'll offer at no charge. 

First of all, there doesn't seem to be a shortage of gasoline.  The quantity demanded seems to equal the quantity supplied, so there is enough to go around.  It's just trading at a high price.

Second, demand is a model developed by economists to represent the relationship between the price of a good and the amount people are willing and able to purchase.  People respond to incentives and when faced with a higher price, consumers cut back their purchases of the good and search for alternative goods.  Consumers also respond to other things, like changes in their incomes, changes in prices of other goods, changes in price expectations, etc. 

One thing that does not shift demand is a change in supply.  What consumers do respond to is a change in price brought on by a change in supply, and decreases in supply drives prices up.  Depending on how much time they have to adjust, consumers cut back their purchases.  In other words, they don't buy more - they buy less.

Of course, if people expect that prices will be driven even further upwards, then they have an incentive to buy more now.  In other words, inflation expectations can be self-fulling.  But this is quite different from shortages causing demand increases.

Comments

[mateosquared]

Thank you... It is unfortunate how many people forget the basic principles of economics, and then act as innocent victims to their own actions. The sad thing is that the majority of the people watching that agree with what the talking head was saying. Great podcasts... on Radio Economics.

[Phil Miller]

Thanks for the kind words. We always try our hardest. I'm glad you enjoyed them.