So many of the decisions we make in our everyday lives can be discussed or predicted using economics. Here's a step-by-step example:
- People desire (demand) gasoline. We use it in our cars so we can go!
- Gasoline comes from countries (mainly OPEC supplier) who seek profits and control distribution.
- Because of supply (OPEC) and demand (me and you) we sometimes faces ridiculously high gas prices!
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| Choice |
That's economics in action! When faced with any decision - from buying outrageously priced energy to choosing to go back to school - we weigh the benefits against the costs. Rational people will make decisions where the benefits are greater than or equal to the costs (I'll leave it up to you to decide if paying $4/gallon for gas is "rational" or not).
As of late, gas prices have slipped a tad. I filled up for $3.45 this weekend. Last summer I was surely paying in the $3.80s*. But 12 years ago when I left home for college, price per gallon was about $1.25 in Atlanta. What gives and who do I blame for all this volatility??
People like to point to years that gas prices were more "acceptable," then associate any changes (new President or frequent oil spills, for example) with ruining the good ol' days when prices were low. Not fair. Economics on the macro-level is indicative of the choices made by its myriad micro units. If we are more willing to pay $4/gallon, than we are to carpool, we're implicitly telling OPEC that the price is negligible. These countries will continue to earn greater profits as long as our demand stays the course! In this sense, demand creates supply and not the other way around. Sure OPEC has the best and the most oil, but it's worthless until a market for oil opens and flourishes. When cars begin to run on beer, expect to see Anheuser-Busch, Corona and Fat Tire merging to restrict supply and push up prices. It's just economics. We like gas and well, we like beer too. Prices will rise to see just how much we like them.
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| Custom made beer tap gas pump by GarageArt.com |
But by how much will demand for gas rise as energy prices creep north? Economists use a measure called elasticity to answer this, but to keep from boring you to pieces, suffice it to say that gasoline is pretty inelastic: Americans don't respond to higher prices by demanding less gas. We just pay for it and keep pushing. But why?? One reason is that after adjusting the volatility of gasoline for inflation, we're in a place we've already been so it's not that big a deal (relatively speaking). Take a look at adjusted gas prices since 1919:
After accounting for inflation, I was right to feel great about gas prices in 2000 and in Atlanta, they were lower than the national avearge shown above. But these last twelve months are more like the late-1970s and early 1920s. It's not new or even excessively high; but it is very similar to the purchasing power Americans had in those eras. So spend like you know and stop acting so brand new. If your parents or (great)grandparents came of age during either of these times they may well have lacked the daily convenience of debit cards, extensive education (despite skin color), and personal automobiles. During these eras the nation had less debt and higher taxes as well. Since they made it, how will you? What choices do you exercise when faced with increasingly higher energy bills?
Everything in perspective and moderation. Prosperity,
@RogueEconomista
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