Here’s an extra credit assignment I gave my principles of macro students last week when we were talking about supply and demand. Fans of Russell Roberts might recognize that this is inspired in part by chapter 1 of The Invisible Heart.

A friend of mine once posted on Facebook that “life is too short to mess around with the last 2% of the toothpaste in the tube” (I paraphrase from memory). How does this help us understand why supply curves are generally upward-sloping? Please report on the following:

1. When you last brushed your teeth, was the tube mostly full, mostly empty, or somewhere in between?

2. How easy was it to get a squeeze of toothpaste?

3. As the tube nears empty, do you expect it to get easier or harder to get a squeeze of toothpaste?

4. How will you ultimately respond?

5. What does your answer to #4 suggest about the following claim: “we will run out of oil in our lifetimes”?

And here are my answers:

1. When you last brushed your teeth, was the tube mostly full, mostly empty, or somewhere in between?

Luxuriously full.

2. How easy was it to get a squeeze of toothpaste?

So easy a baby could do it. And if our baby got ahold of it, I’m’ sure he would.

3. As the tube nears empty, do you expect it to get easier or harder to get a squeeze of toothpaste?

As the tube empties, it will get harder and harder to squeeze toothpaste out of the tube. The marginal cost of each extra squeeze of toothpaste is rising. Getting squeeze #1 is really easy, like getting oil out of the ground in the Middle East. Getting squeeze #100 is much harder, like getting oil out of the tar sands in Alberta, Canada.
4. How will you ultimately respond?

I will buy a new tube of toothpaste.

5. What does your answer to #4 suggest about the following claim: “we will run out of oil in our lifetimes”?

I am confident that we will never, ever, ever run out of oil (note that not all of you answered this way). #4 suggests that as it gets harder and harder to acquire toothpaste, we seek substitutes. The same holds for oil. If we expect demand to rise faster than supply in the future, the price will increase. If we expect a higher price next year (or in ten years), we have an incentive to take oil today off the market and sell it in the future for the higher price.

This is one of the really awesome things prices do: prices aggregate and transmit information about everyone’s best guesses as to current and future supplies of and demand for resources. If you know better than everyone else what the market for oil will look like in ten years, then you can profit handsomely from this information. There are a lot of people who make confident predictions about how we will run out of this or that and yet refuse to put their money where their mouths are by purchasing financial assets that would allow them to profit handsomely from their superior insight. The fact that they don’t do so and use their profits to address the problems they foresee reduces my faith in their predictions.

You might recall that Harold Camping predicted the end of the world on May 21, 2011. It didn’t come to pass. We have a pretty bad track record when it comes to predicting the end of the world–and this goes not only for preachers and self-styled religious prophets, but also for self-styled environmental prophets. I discuss this in greater detail here.