Big Planet

Why is Supply and Demand so confusing?

In critique, popular economics, reblog on July 29, 2009 at 11:49 am

Scott Sumner, professor of economics at Bentley University, wrote an honest-to-goodness article about the general confusion that students, teachers and business journalists have in thinking about supply and demand. I found the article through the site of Greg Mankiw, the author of the textbook which Sumner refers to in this illuminating article. Consider this:

Question:  A survey shows that on average 100 people go to the movies when the price is $6 and 300 people go when the price is $9.  Does this violate the laws of supply and demand?

Very, very few can answer this question, especially if you ask for an explanation.  Even worse, I think there is a perception that there is something ‘tricky’ about this question, something unfair.  In fact, it is as easy a question as you could imagine.  It’s basic S&D.  It’s merely asking students what happens when the demand for movies shifts.  I cannot imagine a less tricky question, or a more straightforward application of the laws of supply and demand.  In the evening hours the demand for movies shifts right.  Price rises.  Quantity supplied responds.  What’s so hard about that?  And yet almost no student can get it right.  Our students enter EC101 knowing one of the two things they need to know about S&D, and they leave knowing one of the two things they need to know about S&D.  Maybe instead of having them memorize mind-numbing lists of “5 factors that shift supply,” and “5 factors that shift demand,” we should just tell them to read something that will explain what economics is all about, something that portrays economists as detectives trying to solve the identification problem, something like Freakonomics.

Scott Sumner articulates one of my personal concerns in studying economics. I felt that the general concepts, when you really think about them, really lack the empirical basis of the natural sciences. I thought that a more comprehensive education would make the philosophy of economics indispensable to clarify abstract concepts like value, exchange, utility, price and demand. These terms never fail to confuse me, though what I like in general is how the universe of economics can be postulated in the form of a labyrinth.

The author criticizes the manner with which reputed publications talk about the subject. “I feel like something is wrong.  What they are doing is about as closely related to economics as astrology is to astronomy.”

The full article can be found here.

Related posts:
Economics post archive

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