Every student who has taken introductory economics will tell you “if the price rises, less will be bought.” This is so firmly believed that is has been called “The Law of Demand.”
We even have a little picture or diagram that shows a line flowing from the top left downward toward the bottom right. And we put a big D on this line for Demand. So it hath been said and so it shall be.
Sadly, the student and the instructor often forget that both the picture and the law are simplifications used to teach distracted and indifferent freshman. What we often neglect to say is “all things being equal,” by which we mean all things being the same.
Yet where in the world will we find all things being the same even an hour apart? The number and variety of people passing a particular street corner does not remain the same throughout the day, or from day-to-day, let alone month-to-month or year-to-year.
Our Law of Demand, nonetheless, is the rock upon which economics rests and this minor imperfection is not enough to throw out the whole doctrine of economic thought.
Come with me now away from this cool stream of lofty contemplation and enter the hot house of empirical reality. Let’s see what is actually happening to prices and the quantities purchased of things we know well.
We’ll start our adventure looking at food services and accommodations (everything from a burger and a room at Motel Four to dinner and a suite at the Ritz). Over the past two years (second quarter 2011 to the same three months of 2013) prices rose 5.3 percent in the United States, but our consumption rose by 6.1 percent.
Prices went up and so did the quantity we consumed, a violation of the Law of Demand. But not so. Perhaps our incomes rose during those two years. Perhaps the numbers of people increased. Both would be very rational, ordinary changes. Nothing here to get excited about.
For all consumer goods and services, prices climbed by 2.9 percent in those two years while the quantity purchased by us rose 4.2 percent. The biggest price increases were found in financial services and insurance (6.2 percent), but there the Law of Demand did well with total purchases rising a mere 0.5 percent.
On the other side, the greatest fall in prices came in recreational goods and vehicles (bowling balls, ice skates and RVs), a whopping 11.5 percent decline that was accompanied by a 22.7 percent increase in the quantity sold. The Law of Demand is looking mighty good.
While many question the fundamental wisdom of Federal Reserve Chairman Bernanke, they might do well to consider the fact that basic economics has a strong record of guiding us to the right answers. Even a simple “model” used to teach freshman, flawed as it might be in some respects, leads us to better answers than does the jabbering of those who never bothered to learn basic economics.
Who are those folks? You’ll find them all across the AM radio dial, sitting on your county council, and representing you in Congress.