Friday, May 19, 2006

Bad Economics at the Lunch Table

I have some very intelligent colleagues, but their understanding of economics sometimes leaves a little to be desired. Today, the discussion came around to the fact that someone had seen on TV that rental car companies were charging a higher price for smaller cars than for larger cars, as a result of the high gas prices. This was widely seen as being "awful", "crazy", and cynically "the American way". Well, yes, if the American way includes capitalism (which I hope it does, despite what people want to happen to gas prices. What's happening is that the high gas prices have increased demand for smaller cars. What happens when demand is increased for a given product? Any of my economics students could tell you that the prices goes up. Let's hope they remember that rule for the rest of their lives so they can avoid frustrating their econ-literate colleagues at the lunch table.


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