Thursday, March 22, 2012

Thinking about markets

What would the average person think if you said "I don't know why what I pay for gas in a month has been going up consistently for the last several months - I fill up my tank as often as I always have, so why am I paying more!"

The average person - I hope - would give you a blank stare of disbelief. Gas is sold on a market, after all! Price changes affect how much you pay, even if you're using the same physical amount of gas as you always have.

But then, gas prices are posted prominently on big billboards so everyone knows that the price moves around. It's amazing how rapidly intuition about markets disappears when we don't have that information in our faces. Maybe this is atypical, but I was shocked by a conversation I overheard at a restaurant last night in the booth behind us to the point that I almost turned around and interrupted the conversation (to Kate's relief, I didn't). This guy was talking about his electricity bill and how it had increased a lot since last month. "It's not like we've been leaving the TV on or doing anything different", he said. Someone was screwing him, he concluded. But maybe even if you didn't do anything different, other people did! Maybe our unusually warm last couple weeks lead a lot of people to turn off the heat and switch on the AC. Maybe electricity demand always increases as we transition from winter into summer. If prices per kilowatt were posted as prominently as gas prices, perhaps this conversation wouldn't have happened - but it is surprising to me that these sorts of points can be lost on people.

One interesting thing I learned recently about electricity pricing (at least in some areas) is that your pricing is a function not just of your electricity use, but also your peak use in a month. I hadn't realized that. So I guess that means dry your laundry at night when all your other lights and appliances are off to get a lower bill.

This all reminded me of a good post by David Henderson yesterday on confused thinking about quantity sold and the demand schedules. I've found that this is one of the toughest things to get students to really assimilate: the difference between a movement of the demand curve and a movement along the demand curve. They have no problem drawing it all out on a graph - that's fine. What I've found they have trouble with is (1.) taking a verbal explanation, like this article that Henderson cites, and translating it into a supply and demand graph, but even more so they have trouble with (2.) explaining what they've graphed in a way that distinguishes quantity demanded from the demand schedule and quantity supplied from the supply schedule.

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