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Unformatted text preview: THEMARGlN-SEPJOCF; l988-PAGE 42 ’ Dick. lane and Spot and lake Communications instead. But the problem isn‘t with the material. . 11mm isn't anything terriblycomplex about how Dick. lane. and the dog play together. unless you‘re a Freudian. It would only seem hard because of the language. The same is true of graphsflhe ideas they present are simple. It's the language that can get tricky. Happily. the language of graphs is a simple one to learn. fitere are no irregularities. no tricky oonjugatiorts. no weird future post i perfect subjunctives. But there are rules. and you‘ll have to learn them. Your text will have a section on graphs. Take tlte time now to work throughit. Whenever you spot a graph in the text. or anywhere else, take out some paper and draw it yourself. Economics isn't a specular sport. You won't lean't it lay-watching someone else do it. There. You've got two in a now. Now. suppose that neither of the tint two things cverhappened. and that an invasion of the Giant Tomato Worm begins. Huge herds of tomato worms begin ravaging the land. gobbling up tomatoes. They eat half the nation‘s crop. ECONOMICS ISURVIVAL GUIDE The Margin 'S (almost) S ure- Fire Guide .to Supply and: Demand ; . >A'Glant Tomato Worm Eating a Tomato Rate No_ 3; Know how to m You should be able to draw the initial supply and demand curves widtout even think— - ing. Some students just sit back and watch other people draw supply and demand curves. Then they get to the exam and they realize (they're never drawn one themselves. They experience a . . . on known as Marshallian Panic and r r, $1;er still thtnkmg abouttomatoes'! Of 5 up. The “sun ism“ mm} ' UK. One more tomato qut'stio'n. Suppose \d, tomato farmers discover that setting up huge speakeasinthefieldsandplayingtapesofallthe speechesofGeorgeBushoninternatiorultnone— ' 'taryrefonncausesthegianttontatowormstofall P asleepinthefieldsl'lheygettoonmdtstmasa result! They die of sunstroke! Their rapidly decomposingbodiesntmouttobeakindof miracle tomato worm mulch! Tomatoes grow like crazyl‘Out'pttt soars! This isgoingtobecake—or.as wesay in the tomato biz. ketchup. Willi zillions of tomb toespiledupindtcszatlteprioewillfalland memwillbemoremnsumpuomrighflOfcourse righL There. You haven't even started and you already know cvaything you need to know amsupplymmNW.whalngum doing one'ofdtue problems with all the fancy littlecurvesandalLtakcamomentfirsttothink. Whatwill heppentoprioeandouWAndmake surctltepicttn'eyoudmwmatchawhatyou already know deep down inside. Are you still drinking about tomatoes? You can stop now. Supply and demand. Grappling with these filmy little curves seems almost tobea rite ofpassage ' in the introductory econ course: 7 ' ‘ And well it should be._Supply and demand analysis isattheheartof virtually allofeeonoru- ics. Ifyou're going to survive Econ Lot; 101. or whatever. you‘ll have to master supply and demancL And you‘ll-have to do it now. ‘ 7 "_ So. in the spirit of helping you make 'it through your coon course and continuing td buy The Margin. we offer the following virtually sure-fire guide to supply and demand analysis. “What would happen to quantity? Of course it would falL With hardly any tot-names available tobuy. what would happen to price? Of course it would rise. You knew that. didn‘t you? of worse you did. - 6 Rule No. 1: Trust your Instincts - The truth is. you probably already know everything you need to know about supply and demand. Here's proof. - "Think about tomatoes. Nice. rod. juicy tomatoes.— Are you thinking about tomatoes? Fine. Now. we‘re going to ask some questions about tomatoes. We‘ll want to know what hap— pens to the quantity consumed and to the price as a result of each ctran Are you'ready? Are you still thinking about tomatoes? Of course you are. - Suppose scientists discover that eating a tomato 1 day prevents baldness and unsightly cellulite bulges. What would happen? Do you think people would end up consuming more tomatoes? Of course they would. What do you think would happen to the price of tomatoes as all those people rushed to the store to buy tomatoes? You think it would rise. don't you? of course you do. There You've already nailed the first question. and you didn't have to know a thing about supply and demand to do it. Your annoy- ing little nephew could have answered that. Now suppose scientists discover that tomatoes not only do not prevent baldness or cellulite. but that they're what's been causing zits all along. What do you think would happen? Would more or fewer consumers be buy- ing tomatoes? You know the answer to that—— fewer. Consumption would fall. What would happen to the price as people stopped buying and ggté%t3mvrgu _'.’ It would fall. wouldn‘t it? Of You should be able to draw this much in your sleep. But belore doing so be sure to talk it over with your roommate. or your mother. or yoUr friend. first. So. practice drawing the little devils. In addition to practicing drawing them correctly. practice drawing them wrong. Try to see Why they're wrong. in particular. get to the point that the very sight of a picture like the following sickens you. You shouldn’t even be able to imagine drawing apicture like this on the exam. it violates everything economists hold dear. lt Rule Nm 2: the Lingo was probably drawn by a Democrat. Supply and demand analysis um graphs. Andgraphsareakind of language. You‘ve got to learn the language if you‘re going to understand anything in youreoon oonrse. If you haven't fooled with graphs in awhile. or ever. they're going to look like a foreign language to you. And they're going to look hard. Suppose yo'u 'picked up a first grade primer on how Dick and Jane play together with Spot. But suppose it's written in Greek. It would look hard. right? You might look at it and say. "That's Greek to me" and drop your course in A picture like this should literally turn your storm ach. In any event. it will get you a bad grade. PAGE 43-SEPJOCI‘. l988-THE MARGIN The best way to avoid disasters like the previous picture is to take a minute and check why they're wrong. Take a minute and mark a couple of points on each curve. Travel between them. As you travel. pretend that you're a rock in chess. Or a castle. Chess people use both names for the same thing. which is why you wouldn't want your sister to marry one. Anyway. a rock (aka. castle) can travel in only two directions. up and dawn and sideways. Travel like thaL What happens when you travel between two points on the upward sloping demand curve? Price rises. so people want to buy more. Does that make sense? Of course it doesn't. Now travel back the other way. Price falls and people respond by wanting to buy less. Does that make sense? If you heard that the store was running a special on tomatoes would that make you want to buy fewer tomatoes? Of course it wouldn’t. Sony. You weren‘t supposed to have to think about tomatoes anymore. Anyway. take the same trip on the down- ward sloping supply curve and confirm that it doesn't make sense. Rule No. 4: Shin the right curve! Now we get to the hardest part. You'll get some problem. usually about something of In agricultural nature. lt'llbesomething likeoneof our tomato questions (by the way. never order herring at a restaurant that spells tomato with‘an e). For starters. when you're just getting started it's almost neverthe case that both curves will shift. It's more likely to be just one. But which one? The answer can be uicky. Suppose we go back to the presumption that it has been discov- ered that eating tomatoes prevents baldness and unsightly cellulite bulges. I know we told you that you wouldn‘t have to think about tomatoes again. but that was a lie. 50 sue us. Of course. you already know what hap— pens as a result of following Rule No. l. Remem- ber Rule No. [1’ Of course you do. But now you've gottodrawiLOneofthecurves willshift. ls it the supply curve or the demmd curve? You might respond to this event by saying something perfectly reasonable like “well. people will want more tomatoes and so produc- ers will produce moretomatoesandsothesupply will go up." Then. you might do something really bad like shifting the supply curve up. and drawing a picture like this one. Q WWI “Well. people will want meg omatoes a so producers will produce more tomatoes and so the supply will go up.‘ first. notice that your result violates your intuition. And what are you supposed to do with your intuition? Trust it. Your picture says that the quantity of tomatoes goes down. And that doesn't make sense if people want to buy more. does it? Of course not. The mistake you made is pretty easy to make. You shifted the supply curve to the left. which is a reduction in supply. To show supply going up. you shift it down. And to show supply going down. you shift it up. Got it? Are you still thinking about tomatoes? Actually. it's better not to think of the supply curve going up or down. Think of supply as increasing or decreasing. and travel with re~ spect to the quantity axis. Then. traveling in the direction of increasing quantity meanstravelling to the right. As our cousin Elmer used to say. “You cain'thardly every go wrong when you go to the right." Notice cousin Elmer said “hardly ever." Suppose you get the part about not shifting the supply curve the wrong way and then say the following: “WelL people will want more toma- toes and so producers will produce more toma- toes and so the supply will go up.“ You‘ll draw this picture. It‘s not bad—it shows after all. that quantity will increase. But what did your intuition tell you would happen to price if everyone raced to the store to buy toma- toes? it told you price would rise. didn't it? Of course it did. But your picture shows prioefal'l- ing. As Richard Nixon used to say. “we could do it. but it would be wrong.” Fri I Manly Weltpeoplewinwantmoretomatoesandso ptoduoerswlllproducemoretomatoesandsothe supptywilt inta'ease.‘ Producers will produce more tomatoes all right. but they‘ll do it as a response to a higher price —a higher price produced when the de- mand curve shift: to the right. The supply curve doesn't shift at all! The best way to decide which curve to shift is to imagine the initial price—the equilib— rium price. when the original supply and de- mand curves intersect—as given. Unchanging. immutable. Poured in concrete. Never mind that the point of the problem is that it changes. imagine for the moment that it's constant. Then ask yourself whether. at that price. the event in the question would change the quantity people would want to buy. if the answer is yes. shift the demand curve. Now ask if. at that price. the event would change the quantity producers want to produce. it the price of tomatoes were 491! apound and it e‘ P was always going to be 49¢ a pound forever and ever. would the announcement that eating toma— toes prevented baldness cause producers to run out and grow more tomatoes? No. in general. an event will change supply only if it changes the profitability at any given price of producing the good. When people go to the store to buy more tomatoes. they'll bid up the price and that will induce more production. Butat the initial price it wouldn't—and so supply doesn‘t move. Here’s the tight prtswer. The demand increases. forcing pnoe up. The higher price Induces an Increase in the quantity supplied. The same idea works for something that will shift the supply curve. Suppose the wages of tomato~pickers rise. It will cost more to produce tomatoes. Fust. you attacktheproblem intuitively. if it costs more to produce tomatoes. their price will rise. right? Ofoourse. Do you think that will result in their being more tomatoes or fewer? You said fewer. right? Of course you did. To do the graph. draw the initial figure. The one you can do in your sleep. Now. ask whether. at the initial price. a change in the wage of tomato-pickers would change the number of tomatoes people want tobuy. It wouldn't. would it? Of course not. Do youknow what the wage of tomato-pickers is now? Do you care? Of course you don‘t. if the number of tomatoes people would buy at the initial price doesn't change. the de- mand curve doesn't change. Would the number produced at the price change? Of course it would. It would fall. That means less will be supplied at that price. and that means the supply curve will shift to the left. Price will be higher. and quantity will be lower. Just as you thought. There. That wasn't so bad. was it? It was? Oh. well. 'l'hemain thing is tofollow the rules. And to practice. And practice sortie more. And don't ever stop thinking about torna- toes. LABOR-MANAGEMENT RELATIONS DEPT. EMPLOYEES TO BE ALTERED IF BAD WEATHER NEARS —Headline in Boeing Plane Talk ...
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