In This House, We Believe Demand Curves Slope Downward to the Right I
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!
Safety in the Sky
A 1988 fiery plane crash prompted two Republican legislators to propose a piece of legislation that would have surely cost lives on net, had it passed. Their law stipulated that any child under the age of two be strapped into a protective seat, like a car seat for planes. Economists were quick to condemn this proposed law—not because they are sociopaths, but because they grasped the relevance of the law of demand.
Imagine a mother traveling with a child. This law would have increased the price of her air travel by 100%. Instead of paying for a single seat and holding the child on her lap, the law would have required her to pay for two seats. (Let the public choice analysis commence).When the price of something rises, people do less, but more importantly, they search for substitutes. People don’t take to the waterways when flying gets more expensive—they drive!
In the late 1980’s, when this legislation was proposed, driving was thirty-five times more likely to kill a person than was flying. The ratio for serious injuries was even more lopsided in flying’s favor. Had the law passed, it would almost certainly have cost infant lives, on net. The best demand examples teach other foundational economics concepts along the way. I like this one because it leads right into a public choice discussion—cui bono? Who benefits from this regulation? The example is also instructive because of just how “invisible” infant deaths on the roadways would have been. Who would have connected a tragic car accident—five years later—to the passage of this law?