Life would be pretty boring if we were only allowed to form opinions on and discuss matters that we had studied extensively. Often times, part of learning about a subject entails making somewhat shaky declarations on how you think something works, and then having others with more knowledge explain through gentle nudges how and why you weren’t quite right. However, it takes a fair amount of confidence to not only make a statement on a subject you’re only tangentially familiar with, but to try to actually explain the concept to others. It takes even more confidence to be willing to publicly correct whoever made the statement, calling him or her out on the misinformed opinions that were presented. All of that being said, a large part of why I created stealtheconomics.com was specifically to point out misinformation in the news, as it pertains to economics. So while it’s difficult to try to correct someone’s claims, I usually won’t fault someone for trying. This past week presented a glaring exception.
Last Thursday, the internet was abuzz with pretty much everyone who has ever taken an introductory economics course (and as you’ll see, maybe some who haven’t) calling out Secretary of Energy Rick Perry for an incorrect explanation of economics principles that he delivered while visiting a coal plant in West Virginia. The quote in question was in Secretary Perry’s misapplication of a fundamental building block of economics; Supply and Demand.
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(Photo credit: Gage Skidmore on Flickr)
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According to reports, Perry stated “Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.” This statement does not agree with traditional economic theory. It implies that anything that is supplied in larger quantities will invoke larger quantities being demanded. If this were true, you would find that when your business was having trouble finding buyers for your huge warehouse of fidget spinners, and sales had stagnated, you should just produce many more fidget spinners to solve the problem.
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When I first became aware of this statement, I wondered if it had flown under the radar enough to be featured in a story of its own on this blog. Fortunately, when you’re in a high profile position like the Secretary of Energy, many people appear to be watching to point out when you don’t get your ‘little economics lesson’ quite right.
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| (Photo credit: Wikimedia Commons) |
One such outlet that was quick to jump on the story was CBS News. The site featured this article, which correctly pointed out that Perry’s explanation of the concept of Supply and Demand was pretty far off. The author of the article, unfortunately, did not stop there. The journalist went on not only to point out that Perry’s explanation of this economic concept was incorrect, but to try to explain this concept in her own way, as follows:
“The gist of the theory is, if the supply for a product is low but its demand is high, the product’s price is likely to increase. If a product’s supply is high and the demand for a product is low, however, the product’s price is likely to drop.”
While attempting to point out one person’s blunder, the journalist makes a mistake of her own. The problem is, the price for a product is determined (in general) by the equilibrium reached at the point where Supply and Demand intersect. At this price, the Quantity Supplied = Quantity Demanded, and the “market clears”. It would be correct to say that a product with relatively high demand or relatively low supply would have a relatively higher equilibrium price, and vice versa. However, the only way to get a change in price (to have the price “increase” or “decrease”) would be to observe a shift in Supply, Demand, or Both. Thus, if a product’s supply is high and the demand for a product is low, the product is likely to have a relatively low price, but the price wouldn’t be expected to “drop”, as Supply and Demand aren’t changing.
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