Lynne Kiesling highlights
a simple economic concept that somehow evades many otherwise sensible people: People change behavior based on information they glean through prices. Somewhat fancied up with jargon, an economist may try to explain elasticities which is the rate of that change.
On Lynn’s mind today: Gasoline. One might expect that when prices go up, people would consume less. This observation was made several times here inthe Lockerroom.
Check out the graphic
created by Professor James Hamilton (also linked through Lynn’s post) at the econobrowser blog. Sure enough, when prices spiked post-Katrina, demand for gasoline plummeted. Hamilton also points out another commonsensical notion. Elasticities — how we react — changes at different price points. The same graphic shows relatively higher prices and growing consumption early this summer. All this shows is that consumers didn’t mind paying more — up to a point. We found that point with Katrina.
Yes Virginia, demand curves do indeed slope downward. Here’s hoping that policymakers take heed…Leave prices alone. The market does just fine without your “help.”
