Thursday, October 12, 2006

Hundreds of 'economists' say... 

...that they don't understand economics. This will be explained to you by Russ Roberts and John Palmer, the latter of whom has this marvelous note:
One of the questions raised some years ago by someone teaching in the scionomology department was, "How can raising the minimum wage cut back on the number of our graduates who get jobs flipping burgers? You still need just as many burger flippers." [translation: isn't the demand curve for socionomologists burger flippers vertical?]

He was wrong, of course.

First, burger-flipping has become more automated at fast-food restaurants; burgers are partially cooked in advance and then microwaved to order.

Second, when fast food prices go up, we tend to buy more frozen food at the grocery store and microwave it ourselves. And that food is produced under much more capital-intensive conditions.
Vertical demand curves are mythical beasts, no more real than a unicorn. So wrote Paul Heyne in his most excellent The Economic Way of Thinking. Which is more inelastic, the demand for labor at McDonalds or the demand for insulin to a diabetic? But is its demand curve perfectly inelastic? Heyne answers:
Well, we already recognized that a better diet and holistic health are are considered substitutes, and we could, if we like, perhaps add prayer, the power of positive thinking, a slew of others to the list. But suppose you're still skeptical. Let's assume -- temporarily -- that diabetics do not consider any of these as potential substitutes. If we assume the demand for insulin is completely vertical, what are the implications? Diabteics would fulfill their prescriptions (again, on doctor's orders) regardless of the price they themselves have to pay for insulin. If their prescription costs 3 dollars a week, they'll do it. If the same prescription costs 30 dollars a week, they'll do it. If it costs 300 dollars a week, they'll do it. Or will they? The economic way of thinking suggests, instead, that prayer would look like an increasingly attractive alternative as the price of insulin rose.

Suppose instead that the price of insulin is 30 dollars a week, and then drops substantially to only a dollar a week. Would more diabetics use insulin now? Yes. But what does that imply? Diabetics are more likely to fill their prescriptions when their out-of-pocket cost is lower. The quantity demanded increases as the price they pay decreases. Of course, this means that the demand for insulin is downward-sloping...

Most purchasers will respond at least a little to changes in the cost to them, and all purchasers will respond to a sufficiently large change. If this seems too obvious to bother mentioning, consult your daily newspaper for evidence that it is by no means obvious to everyone.
Or consult "hundreds of economists".