Correct the Journalist

I found this article from March 2008, in which business writer John Wilen writes:

Q: If people are driving less, why do gas prices keep rising?
A: People are indeed driving less. Gas consumption has fallen about 1 percent since late January.
Yet, gas prices are on the rise. Gas has averaged more than $3 a gallon for four straight months and, more recently, has surged into record territory. Estimates of how high gas prices will go this year vary from $3.50 a gallon to $4. But virtually everyone agrees prices have higher to go before they fall.
This disconnect between demand and price may seem to violate fundamental rules of economics, but gas prices are actually responding to demand of a different kind: From investors.
...
Unfortunately, consumers pay for this investment frenzy in the form of higher pump prices. And despite mounting evidence that Americans are cutting back on their gasoline habit — and may cut back even more drastically as gas gets more expensive — it may be some time before prices start responding to lower demand.

His explanation regarding speculation is correct as far as one possibility goes, but there is an error in the last paragraph, and 3 other possible supply and demand explanations for why the relationship (price going up and quantity going down) is being observed.

Identify the error and the 3 possibilities. The answer is in the comments.

Spot the Error in Supply and Demand Logic

Pick out the error presented in this CNN article covering a study given to Congress, the answer is in the comments.

According to the study, investors poured $60 billion into oil futures markets during the first six months of the year as oil prices soared from $95 to $145 a barrel. Since then, investors have withdrawn $39 billion from those same markets as prices have retreated.

Michael Masters of Masters Capital Management, which did the study, said the flow of money - not major changes in supply and demand - caused the volatile movement of oil prices. The report was released Wednesday by Senate and House sponsors of bills to put additional curbs on oil market speculation.

Camels and Gas

As oil (and gas) prices rise, those in India are switching to camels instead of driving their cars:

“It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled.”

The economics of it then...how does a increase in the price of oil lead to an increase in the price of camels?

1. The price of oil increases.
2. Oil is a complement good for cars.
3. Demand for cars falls, putting downward pressure on car prices.
4. The falling car prices do not offset the rising cost of driving the car.
5. There is an increase in demand for substitute means of transportation, including camels.
6. The price of camels increases.

Hat Tip: Kids Prefer Cheese.

Lessons on Minimum Wage Causality

Hilary Clinton was on Jay Leno, and she tells this story about a 11 years old boy in Indianapolis (See 3:23 here):

... he said, "You know, my mom makes minimum wage and even though it went up, her hours were cut. So we're not making any more money. Can you help her?" You know, when somebody says something like that to you, it really does kind of energize me. I think, yeah, I can, I'm going to really try to help you, because this is wrong.

Watching her response, the causality appears to be lost on Clinton. The minimum wage caused the reduction in hours. Just as importantly, there is nothing that can be done about it. If I hold my iPod out over the floor and open my hand it will fall to the ground, and there is nothing Clinton can do about that either. Congress cannot pass a law changing the Laws of Demand any more than they can the Laws of Gravity. On a smaller note, I am concerned that a child so young is looking to politicians to solve their problems, especially when these particular politicians have no power over the situation, regardless of what they tell people.

HT: Cafe Hayek

Gas is Still Cheap

For those of you upset about the news of retail gas hitting the highest real (meaning adjusted for inflation) price in history, be comforted by the fact that it is still historically cheap. Daily prices have large fluctuations, so it is best to just look at annual averages, in which case 2007 gas was still cheaper than it was when the government started collecting this data...in 1919! Consider the graph on the left here based on data from the EIA. The blue line adjusts the prices to the price if you were buying it with 2007 money, while the red line is what you would see posted on the signs at that time.

Of course, this is just the price and it does not account for the improved quality of gas, greater access to stations, improvements in fuel efficiency, etc all of which make gas functionally cheaper to us. More importantly though, it does not show us how much of our budget gasoline takes up. Let us frame the question this way: For an average person living in the U.S., what percentage of their budget would purchasing 1,000 gallons of gas take? Check it out:

The measure of income is per capita personal income available from the BEA. Is it any wonder why most people are not changing their behavior in any significant way to accommodate higher gas prices? Bitching is free, so of course they are doing lots of that.

Organ Market Ethics

It is hard to find an economist who agrees with U.S. law on organ markets. Currently it is illegal to sell your organs to another. This law means we watch tens of thousands of people needlessly die every year in the U.S. and we deny yet another avenue for the poor to find an escape. The current system blatantly favors the rich who have the networking ability to get their name to the top of the list, generating an enormous amount of inequality. Curiously, those who raise "ethical" objections to organ markets seem to get this backwards. Regardless, biochemist Stephanie Murphy at U Mass-Amherst has written a nice short essay titled "Eight Ethical Objections to an Organ Market...And Why They're Wrong."
Hat Tip to the Perfect Substitute.

Market Equilibrium: Future Supply Cuts Increase Today's Oil Price

From CNN.COM:

Oil prices rose slightly Monday, gaining after further hints that OPEC may cut production if global supplies continue to rise.

So consumers expect that in the future there will be a supply shift to the left. Why then did prices rise today? Work it out yourself, then compare your answer to the one I provide in the comments.

Market Equilibrium: Disappearing Bees and Ice Cream

From CNN.com:

Premium maker Haagen-Dazs says vanishing bee colonies in the U.S. could mean fewer flavors and high prices.

So the product market is ice cream. The ingredients used as inputs in the resource market have suffered a supply shock to the left. Trace the effect of the adverse supply shock on the resource market to the final outcome in the product market. You should arrive at the same conclusion as Haagen-Dazs, who correctly states that this will lower quantity and raise prices in the market for ice cream.

Try it yourself, then check the comments for the answer to verify your work.

Venezuela Declares Economic War on the US

Venezuela has cut-off Exxon Mobil from access to its oil as a result of a legal stand-off. Unfortunate for Exxon Mobil, sometimes business deals go badly, but Chavez flies off the handle accordingly by making it some kind of larger issue. Incredibly, he threatens an "economic war" on the U.S. by cutting off supplies of his oil. Apparently he does not realize 2 important points.
1. Who "we" (U.S. firms) buy oil from is not particularly important. Unless they are selling it to us below market price, we would pay largely the same price regardless of who actually delivers the oil. Even as large suppliers, it will be a tiny supply shock at most, as there will be a rearranging of contracts among the different firms.
2. The U.S. economy is massive, the rest of the world is just a bunch of ants compared to us. We are a market economy, we practice relatively free trade internationally and very free trade among our own states. Both the size of our pie and the size each person receives in our country makes us giants in a land of ants, and Venezuela is a small ant. The last country to enter into an economic war on the U.S. was the largest and most powerful socialist regime the world had ever seen and it barely reached our knee-caps before crashing into non-existence. That was almost 20 years ago. We're even bigger and stronger than before with more economic freedom. Meanwhile Chavez is no Stalin, and Venezuela is no USSR.

Market Incentives Trump Regulations

It is not very likely that safety regulations have done much to really improve the quality of life for American workers. In fact, there is a good chance that it has done the opposite. As long as all parties understand the risks involved, which contract law sorts out in the courts, workers will be compensated for higher risk with higher wages through the forces of supply and demand (known as compensating differentials). Regulations that force safety standards wind up forcing wages down as well, and it is perfectly reasonable for some workers to choose to accept higher risk in exchange for higher wages. Interestingly, it is unlikely that the regulations are actually anything more than paper work used to keep out smaller firms or lower skilled workers. Consider the following graph:
If the vertical line illustrating where OSHA was formed was not there, you would not be able to guess when it was instituted based on the graph. Workplace fatalities were already well under decline by the time safety regulations came along via OSHA. Why is this? Because one way to cut costs is to improve workplace safety, causing the supply of labor to shift to the right, and lowering the wages you have to pay. For some numbers from Bryan Caplan:

Annual OSHA penalties for safety violations (2002): $149,000,000

Annual Workers Compensation Premiums (2001): $26,000,000,000

Estimated Annual Wage Premiums for Risky Activities (2004 dollars): $245,000,000,000

The market punishment for riskier conditions is about nine times larger than the government regulation punishment of workers compensation and OSHA penalties. That is why we have the steadily falling time trend pictured in the graph.
Hat Tip: Marginal Revolution, Division of Labour, and EconLog

Irrationality and the Minimum Wage

I have found that the hardest point to get across to students is the many adverse consequences of price controls, primarily because of their attachment to the idea of the minimum wage. Bryan Caplan has the best rejoinder I have ever read for this criticism from students:

What happens when my outraged students reach the "Salary Requirements" line on job applications? They could ask for a million dollars a year, but they don't. When their future rides on it, students honor the economic truism that labor demand slopes down.

The rest of the book is excellent, but would have been worth the read for that statement alone. Raising the wage, ceteris paribus, lowers employment.

Quantity Supplied and the Deathly Hollows

CNN reports on the retail competition side of producing the final Harry Potter book in a way that closely describes the supply curve discussed in principles. Also, this demonstrates the move to zero economic profits of a perfect competition. As the price falls (they use the term "discounting" but this is not quite correct) notice that some bookstores choose not to sell the book. This is a movement along the supply curve.

Wal-Mart Investors: Economic Profit is What Matters

In a CNN article on 5 ways to improve Wal-Mart, it begins by stating that investors are unhappy with the largest U.S. company's performance. It states that Wal-Mart's profits have increased 1%, meaning that they took their investors money, and earned it back plus an extra 1%. So why are investors unhappy about this?

Remember the difference between accounting and economic profit. Wal-Mart has earned a 1% increase in accounting profit. However, most other companies have earned better returns well above 1%. In fact, you could open a e-savings account with Citigroup and earn 4.5%. What the investors here are implicitly complaining about is that Wal-Mart has had a negative economic profit, even though it earned a positive accounting profit. Higher returns, like the savings account, offer a better return than Wal-Mart as of late. As a result, investors have punished them as indicated by a 5.1% fall in their stock price over the last year.

Why Did Gas Prices Rise Over the Weekend?

Predictably, gas prices rose over the weekend. While prices have been rising for a few weeks now for reasons related to wholesale oil, we always expect gas prices to rise on this past particular weekend every year. Why?