The (Gist of the) Law of Demand in One Lesson
There are loose ways of speaking, which are literally incorrect, and precise ways of speaking, meant to convey exact information. As an example of loose speaking, I read in yesterday’s Wall Street Journal (“Why You’re Losing More to Casinos on the Las Vegas Strip,” May 29, 2023):
In addition to smaller winnings, visitors are also paying more to visit Las Vegas. Prices for everything from hotel rooms to concerts to restaurants have surged in recent years. So far, tourists haven’t been deterred.
The last sentence is confusing at best. It means either (1) that no visitors have been deterred by higher prices, or (2) that some visitors haven’t been deterred by these prices.
The first interpretation cannot be true. For zero visitors to have been deterred by the price increase, it would mean that there was no marginal tourist who was close to the point of not gaining net utility (or “consumer surplus”) at the previous prices, and who would thus have been brought into negative utility by the higher prices. It would also mean that no visitor would decrease his visits to, or time in, Vegas. In other words, the implication is a perfectly inelastic market demand curve, meaning that quantity demanded of casino services and other tourist attractions does not change with their prices. This could only happen if there were no other good or service on which these consumers would want to spend their money. If more than one good or service are available, economic theory gives a formal proof of the law of demand, which states that there is a negative relationship between the price of a good and its quantity demanded. Virtually all empirical (econometric) study confirm the law of demand: the higher the price, the lower the quantity demanded.
If some visitors haven’t been deterred by Las Vegas higher prices—the second interpretation of the incriminated sentence—we cannot of course conclude that no visitor has been, and the suggestion that higher prices don’t deter tourists is baseless. (Nor can the whole argument rely on the possibility that a few eccentrics using their contrarian free will could have purchased more because the prices were higher.)
It is true that other factors than prices could have pushed up the whole relation between prices and quantity demanded of Las Vegas services, thus compensating for the increase in the latter’s prices. For example, leisure travel in general may have jumped after the end of the pandemic. But saying that visitors haven’t been deterred by higher prices implies that no one has reduced his quantity demanded relative to what it would have been if prices had not increased. Otherwise, we are confusing many possible causes. Counterfactual such as “relative to what it would have been” constitute an essential part of any causality argument. It corresponds to the ceteris paribus condition: one may only affirm that A caused B if that happens when other things are kept equal.
Examples are endless. When, in January 2016, the CEO of McDonald’s declared that the profit “momentum continued into the fourth quarter with the launch of breakfast all day in October,” he meant that this part of the profit increase would not have materialized if the breakfast menu had only remained available until 10:30. You may say that your wine glass broke because you dropped it on the floor only if you know that it would not have broken otherwise; for example, you don’t think that a tiny time bomb had been imbedded in the stem and set to go off, coincidentally, at the precise moment when you clumsily tripped in the carpet.
The Wall Street Journal could seriously suggest that higher prices caused no change in quantity only by tacitly assuming that other causes changed demand (as opposed to quantity demanded as a function of price). On the distinction between demand and quantity demanded, see also a previous post of mine on this, “A Frequent Confusion and the Yo-Yo Economic Model.”