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Jewish World Review Jan. 25, 2005 / 15 Shevat, 5765 Economics for the citizen By Walter Williams
Part Five of a Ten-Part Series
To reinforce the idea that price is not the full measure of
cost, imagine that you live in St. Louis, Mo. The barber who cuts your
hair charges $20. Suppose I told you that a barber in Charleston, S.C.,
would charge you $5 for an identical haircut. Would you consider the
Charleston haircut cheaper? While it has a lower price, it has a much
greater cost. You'd have to sacrifice much more in terms of time, travel
and other expenses in order to get the Charleston haircut.
People often erroneously think of costs as only material
things, but that which is sacrificed when a particular choice is made
can include clean air, leisure, morality, tranquility, domestic bliss,
safety or any other thing of value. For example, a possible cost of a
night out with the boys might be the sacrifice of domestic bliss.
Costs affect our choices in many ways, and for the purposes
of this discussion, we're going to assume that all of the costs
associated with a given choice are borne by the chooser.
Just about the most important generalization that we can
make about human behavior is that the higher the cost of a particular
choice, the less of it will be chosen, and the lower the cost, the more
of it will be chosen. This generalization underlies the law of demand.
For simplicity, let's assume price measures cost while we hold
everything else influencing choice constant.
The law of demand can be expressed several ways: The lower
the price of something, the more will be taken, and the opposite is true
for the higher price. We can also say there exists a price whereby one
can be induced to take more or less of something. Finally, there's an
inverse (reverse) relationship between the price of a good and the
quantity demanded.
Why do people behave this way? The answer, in a word or two,
is that people try to be as happy as they can. For example, if when the
price of oil rises, people simply ignored the price increase, they'd
have less to spend on other things and be less happy. If they sought
substitutes for the higher-priced oil, they'd have more money left over,
and they'd be happier. That's why higher oil prices give people
incentive to purchase more insulation, buy better windows, wear sweaters
and maybe move to a warmer climate. These choices, and many more, are
substitutes for heating oil, allowing you to use less oil.
When people say a certain amount of one thing or another is
an absolute must, that's like saying the law of demand doesn't exist and
there are no substitutes. That's untrue — consider a diabetic. Can he
do without 50 units of insulin a day? The law of demand says that at
some price, say at $1,000 a unit, he can. There's always at least one
substitute for any good, and that's doing without the good altogether.
In the diabetic's case, no insulin.
While not having insulin has unpleasant consequences, it's a
likely substitute at $1,000 a unit. You say, "Williams, that kind of
economic analysis is cruel!" It's no crueler than the law of gravity
that predicts that if you jump off a skyscraper you're going to die.
Both outcomes are unattractive, but it's reality. Indeed, tragically,
millions of our fellow men around the globe are forced to endure the
unpleasant substitute for insulin.
In the next discussion, we'll explore some interesting
features of cost, choice and the law of demand.
Every weekday JewishWorldReview.com publishes what many in uplifting articles. Sign up for the daily JWR update. It's free. Just click here. Walter Williams Weekly Column Archives
Economics for the citizen, Part Four
© 2005, Creators Syndicate | ||||||||||
