In This House, We Believe Demand Curves Slope Downward to the Right VIII
This series of posts is adapted from an essay originally published on my personal blog, A Fuller's Soap.
During graduate school lecturing, a friend who I won’t name once joked, “We’ve covered downward sloping demand curves—what else is there to teach them?”
Less flippantly, Armen Alchian was once asked about what he taught in his PhD Micro course.
He replied to the effect of, “I teach the theory of demand.”
“And after that?” his conversation partner persisted.
“I teach the theory of demand,” Alchian replied.
See for yourself just how much of his magisterial Universal Economics he devotes to the law of demand.
The problem, for those of us (all of us) who are less gifted than Alchian, is that we can leave students with the sense that they’ve mastered the law of demand if they but memorize the inverse relationship between “p” and “q.” Deep understanding only occurs when students become capable of making pattern predictions about markets, predictions informed by what the law of demand says.
So, if the only economics you knew was the law of demand, how far could you get? As I tell my students in Econ 101, very, very far.
In what follows, I acknowledge a debt to McKenzie and Tullock’s, The New World of Economics, for several of the examples. In other cases, I’ve forgotten the source. My presentation is intentionally short in order to get the gist across, so yes, I’m leaving out details. But you get the point: In this household, we believe that demand curves slope downward to the right.
Paul Samuelson was once asked for an insight from economics that was at once true and non-obvious. He offered the law of comparative advantage. If I had just a few minutes to convince someone of the power of economics, I’d offer these examples of the law of demand as succinctly as I could. What perhaps distinguishes the law of demand from comparative advantage is that the law of demand is even obvious!
Reasoning from a Price Change
Don’t reason from a price change. Just don't do it.
That’s something Scott Sumner reminded us that we should all be on board with. Our own and our students’ reasoning would improve by keeping this front and center. Financial journalists commit this sin all the time.
Here’s my favorite:
“Beer is cheaper in countries where consumption is higher.”
Yes.
It’s called the law of demand.
For various reasons, usually taxes or regulations, the supply of alcohol is dramatically different across EU countries. So is the price and therefore the quantity demand. My own experience has been that each of these example is surprising, non-obvious to non-economists.
I’d be the last to suggest the law of demand is all you need to analyze the social world. But if I only had one concept at my disposal, it’s what I’d choose.