In This House We Believe Demand Curves Slope Downward to the Right IV
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!
Licensing
Rates of death by electrocution are not constant across U.S. states, and the law of demand explains why. Neither, by the way, are rates of dental cavities or incidents of rabies in pet dogs.
In states where occupational licensing restrictions are the tightest, the supply of electricians, dentists, and veterinarians is the most constricted. Their labor services are therefore more expensive in these states.
The logic of substitutes—which comprises the lion’s share of using the law of demand effectively—kicks in again. People substitute DIY YouTube videos for electricians, visit the dentist less frequently, and are less likely to avail themselves of a vet for their pets in states where licensing for these professions is the tightest.
Think about how perverse these outcomes are as compared to the ostensible stated goals of such regulation. We’d like to have fewer unqualified people messing around with dangerous wires; instead, we get more. Intentions don’t guarantee outcomes.
