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May 06, 2008
Demand vs quantity demanded
And now for something completely different...
One type of post that gets people talking is when I discuss the teaching of economics. So a few posts back, I pointed out that the NY Times confused "demand" and "quantity demanded". The Times wrote:
An open letter signed recently by more than 100 economists said the proposed tax holiday would do little to reduce gas prices. In part, that is because a fall in prices would lead to more demand, which would cause prices to return to their earlier level. The result would be that overseas oil-producing governments would get money now flowing to the United States government in gas taxes.
And I said:
The whole sentence about demand is the sort of circular statement that we caution our students not to make but that newspapers print all the time. Not only is it a terrible misstatement of demand vs quantity demanded, it's not even consistent with the claim (advanced by Krugman among many) that supply is fixed.
John Whitehead pointed out something similar in another story. After taking a little heat in the comments, he links back to me approvingly.
Why the heat? Well, I have to admit that when an economics professor starts to pontificate on demand vs quantity demanded, it tends to border on the pedantic. I know it does. I can't stand it, but I do it anyway. Why? Because the misunderstanding often leads to circular reasoning as it did here. You argue that prices fall, which causes demand to rise, which causes prices to rise and you're back to where you started.
Every principles of economics textbook seems to have a homework question devoted to identifying and critiquing that sort of circular reasoning--often from a real-life example like this.
So we've got a a real problem with the terminology here. It's made worse by the fact that the principles textbook terminology has absolutely zero chance of catching on in the wider world. Face it, journalists are not going to use demand and quantity demanded correctly in an Econ 101 sense. Not going to happen. But we need to figure out how to educate them to avoid making hideous errors even if they don't use Econ 101 terms.
I have addressed this before.... Digging into the archives for Polley's greatest hits of November 2005:
Stephen Karlson (Cold Spring Shops) links to Phil Miller's (Market Power) post and mine on a common media mistake. Karlson adds this,
...the source of the confusion in many observers' minds might be in the terminology of introductory economics (and nowhere else in economics) itself.
Much of the discipline refers to the act of drawing a new demand or supply curve as a "change in demand (or supply)," sometimes calling that an "increase" or "decrease" in demand or supply. A new choice along the same demand or supply curve goes by the cumbersome locution "change in quantity demanded (or supplied.)" Bleah. I recommend the use of the term "shift" to describe the drawing of a new curve, and I'm continually reinforcing "left shift" and "right shift" as "increase" and "decrease" have the potential for mischief on the supply curve. A new choice along the same curve is a "movement along."
I agree. Bleah. He is absolutely right that this terminology is only an issue at the introductory level. Why, you ask? Long story. At more advanced levels, the mathematics forces you to keep track of what is going on without resorting to these labels. That's part of it. We (those of us who teach this) also just tend to obsess over making sure students shift the right curve. These labels, properly used, do force you to be clear about what you're doing. But I agree with Karlson that there has got to be a better way.
Unfortunately, "shift" is not likely to catch on with journalists either. That only makes sense if you're thinking of the curve, and most of their readers aren't thinking that way. So I'm still puzzling over this one. Your suggestions, and any discussion on the topic, are very welcome.
Anyway, back to the article at hand, it is true that the writer confuses demand and quantity demanded. But the greater sin is that the passage was not even consistent with the main critique of the tax holiday. And I don't think that these errors are unrelated. Sloppiness begets sloppiness. Once you introduce that circular logic, the next step is more likely to go off-track. If anything, that's why professors need to continue to instill some professional discipline in the use of language to describe supply and demand.
We just need to come up with something that resonates better with journalists.
Posted by William Polley at May 6, 2008 12:03 AM
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Comments
Welcome back!
I was in the parking lot of a small shopping center in Plainview, Long Island about a month ago and there was a car with a Western Illinois University alumni sticker. So you guys are literally ubiquitous!
JJJ
Posted by: john jansen at May 6, 2008 09:22 AM
Thanks.... I appreciate you telling me about a WIU alumni sighting out on Long Island. Always nice to hear about our reach.
Posted by: William Polley at May 6, 2008 05:38 PM