Saturday, December 10, 2005

Supply and Demand -- what a concept

Record gas prices have put a dent in our driving habits. The growth in miles driven in the USA, a mostly steep climb for 25 years, has flattened in the past year as gas prices spiked, according to a USA TODAY analysis of Federal Highway Administration data.

As it should. That is how supply and demand works. When prices rise on any product, eventually, demand falls. Once demand falls, prices eventually fall along with it. The degree to which price effects demand is called "elasticity". The more essential a product is, the less its demand is effected by price swings. There is your economics lesson for the day. If you can understand this concept than you can probably pass most undergraduate Econ courses.

The point here is that the system works. Remember this next time you hear people screaming about "price controls" and "profit taxes". If you artificially lower the price of a product to be lower than its market value, it disappears and you will quickly run out of supply. The reverse is true if you artificially raise the price to be higher than its market value -- you will end up with a glut. So, the moral here is don't screw with the supply and demand curves.

It is good for you to know this. Truth is, a lot of people want you to be dumb on these subjects because your ignorance suits their political purposes. Kind of like my capital gains spiel from a day ago -- if you know the truth, then people like Pelosi can't get away with calling a capital gains tax cut a "tax cut for the rich".

Don't worry about the mouthbreathers around you. Just smile and feel that burst of wind through your nostrils and realize that you truly get it. Cashing out!

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