Categories:
Economic Education
Other things equal, a reduction in price leads to a lower quantity supplied.
But other things equal, price never changes. Price always changes because other things are not equal.
This tweet caught my eye:
This is an example of what I call “reasoning from a price change”. Don’t do it!
Most advocates of increased housing construction are proposing measures that would shift the supply curve to the right, resulting in both lower prices and higher output.
Reasoning from a price change is a very common mistake. You see Fed officials doing this when they speculate that higher bond yields might slow the economy. Not if the higher bond yields reflect higher demand for credit.
READER COMMENTS
Philo
Oct 31 2023 at 11:56pm
Your campaign against reasoning from a price change is mostly futile, but it is God’s work.
Scott Sumner
Nov 1 2023 at 5:07am
I agree.
Jon Murphy
Nov 1 2023 at 6:56am
Adam Smith, writing in the Wealth of Nations, thought that his campaign against mercantilism and protectionism was unlikely to change anything too. One never knows when the truth will take hold of people’s minds.
For whatever it’s worth: in both my upper level and principles classes, I spend a lot of time on reasoning from a price change.
Scott Sumner
Nov 1 2023 at 8:35pm
Don’t forget I trademarked that phrase. 🙂
Jon Murphy
Nov 1 2023 at 8:59pm
I always say “As economist Scott Sumner says…”
Thomas L Hutcheson
Nov 2 2023 at 9:29am
I agree about the substance, but I’m not wildly enthusiastic abut the slogan. Sometimes the context makes clear which curve moved and the “reason” one gives is correct in practice.
grant I do not have a better slogan. 🙂 “Never incorrectly reason from a price change alone,” does no have the same appeal.
Max Molden
Nov 1 2023 at 10:47am
There’s a nice comment by Kirzner on a related topic. In his essay “The Perils of Regulation” he writes:
Scott Sumner
Nov 1 2023 at 8:34pm
Excellent observation.
Thomas L Hutcheson
Nov 2 2023 at 11:36am
That sounds like it as well coud lead to no inhibit discovery of hitherto unknown sources of supply or new products that get around the restriction.
Jon Murphy
Nov 2 2023 at 5:10pm
What’s the “it” in your sentence referring to?
Max Molden
Nov 3 2023 at 9:58am
I think you’re right. Kirzner would, in my opinion, agree as well.
After all, there is no necessity that entrepreneurs discover profit opportunities. It is similar to Hayek’s saying that we cannot know what we miss out on if we don’t let the market process work. This implies that it may also happen that entrepreneurs would not discover anything or the market process not produce anything.
However, I think that large swaths of Kirzner’s work are devoted to determining under which institutional environments we can expect more or less entrepreneurial alertness and thus more or fewer discovery of profit opportunities. And this is decisive, and thus there are strong arguments to make for the view that price ceilings actually will inhibit these discoveries.
vince
Nov 1 2023 at 12:19pm
That tweet is like the joke about efficient markets and the $20 bill on the sidewalk …
Scott Sumner
Nov 1 2023 at 8:33pm
Yes. Or the joke “No one goes there anymore; it’s too crowded.”
Thomas L Hutcheson
Nov 2 2023 at 9:39am
As a bit of an obiter dicta, let me take the opportunity to express irritation at the objective of YIMBY ism (reform of land use regulation and building codes) is to “reduce housing costs” or even more wrong, “promote more ‘affordable’ housing.”
NO. The objective of reform is to increase real income. One manifestation of the increase in real income will be that ceteris paribus some housing somewhere will have a lower price and some may even become “affordable” by some arbitrary definition.”
robc
Nov 2 2023 at 5:48pm
No, the goal of reform is to maximize freedom.
David S
Nov 2 2023 at 9:47am
Developers only build luxury housing which nobody can afford, so if they were allowed to build more housing eventually everyone would be homeless except for the extremely wealthy. And, the character of every neighborhood would be ruined.
Jon Murphy
Nov 2 2023 at 11:24am
I assume you’re being sarcastic?
Thomas L Hutcheson
Nov 2 2023 at 11:39am
We need an universally understood “irony” emoji. Why has the market not supplies us with this? 🙂
David S
Nov 2 2023 at 12:06pm
Yes.
Scott has admonished me for using sarcasm on these blogs.
robc
Nov 2 2023 at 12:11pm
I liked it. I immediately thought of Poe’s Law upon reading it.
Floccina
Nov 12 2023 at 9:09am
To me the more interesting question is, how does a smart person like Connor Sen make am error like that.
Comments are closed.