Nov 1, 2005
Since these articles are meant to introduce the Catholic reader to the science of human action called economics, this is a good point, now that in previous articles we have talked about some higher questions of interest, to get down to basics. Some definitions are in order.
First, economists define demand as the amount of a good or service that the consumers wish to purchase at every price. Demand is negatively related to price. In other words, and this is common sense, as the price goes up most people will purchase less of a good or service. Each consumer has his own demand schedule tucked away in the recesses of his mind. Every social unit has a demand schedule as well, which is the sum of the demand schedules of all the people in that unit.
Supply is the amount of a good or service producers are willing and able to bring into the market at every price. Unlike demand, supply is positively related to price. A higher price provides an incentive for a company to produce more of the good. One of the reasons for this is that it costs suppliers to make more product or to provide more service. A relatively low market price tells suppliers that there is not enough demand to cover their costs, so they cannot bring more to market without losing money and maybe going out of business. When prices start to rise, this tells the suppliers that either demand is increasing or that supply has fallen, or both. In either case, there is an incentive for suppliers to bring more to market. When they do, prices go down again. So, price acts as an information source for consumers and suppliers.
Let us apply this. Gasoline prices have recently gone “sky high” and are now coming down. Politicians and leftists of all kinds get mileage blaming the “evil” oil companies for withholding supplies. Suddenly, people forgot about OPEK, which intentionally withholds supplies to increase price above the normal market price. In addition, drilling for oil in the Western hemisphere is costly and time consuming. When the price begins to rise, producers begin to search for more petroleum, dig and produce. But then the oil must be transported to refineries, refined into the various types, and then sent out. This cannot be done over night. In addition to that, experts tell us that refineries are running at capacity now, so bringing extra oil to a refinery does not increase the supply to the pump all that much. A good study would be, why are there too few refineries? Certainly the companies would make more money with more refineries. Is it government over-regulation? Is it pressure from environmental groups, or from neighborhoods that do not want the refineries?