Tuesday, September 25, 2007

Prof. Whitehead's Favorite Quiz Question

See if you can identify the mistake in the following passage from The Economist.

"At the same time high prices are bound to constrain demand, and unpredictable economic growth and Middle Eastern politics make the future of both demand and supply uncertain."

Hint: exogenous vs. endogenous.

85 comments:

Anonymous said...

Shift in demand curve versus change in quantity demanded?

Anonymous said...

I would guess that the economist didn't separate where we are getting our resources...either from U.S. territory or other parts of the world? Two different supply and demands on one graph?

Lindsay Lamb

Tim Chapman said...

A non-technical response: both economic growth and the state of Middle Eastern politics seem rather dependent on oil supply.

EconAlum said...

Not sure if this is on point or not, but....

High prices will take care of themselves. I recently heard the CFO of Koch Industries say, "the cure for high prices is high prices". (He's assuming that the increase in prices is market driven and not policy/tax driven... an arguement for increasing carbon taxes, i think... but more on that later).

If prices remain high due to tightening supply, short term demand may slow but only until the market responds by increasing supply, at which point demand will once again increase.

While there will certainly be some lag in new supply coming on-line, the supply/demand dance will cycle through many times over before economic growth and the political environment become more stable/predictable.

So, were I the author, I'd worry less about oil prices and their effect on demand and more about the impact of variables that wont solve themselves - namely political and economic instability.

As an aside, we need to look into non-regressive methods of increasing the cost of oil consumption through policy means so that consumption patterns wont be primarilly driven by availability of supply.

EconAlum said...

This is a follow up to the thread on China... wrong place to comment on it, but didnt know if it would be seen in a dated posting.

In this case, the effects of the externality could be felt soon and noticibly impact the day to day lives of Chinese people.

http://www.nytimes.com/2007/09/28/world/asia/28water.html?ex=1348632000&en=f62fec022afb4c5c&ei=5088&partner=rssnyt&emc=rss

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