Sunday, January 18, 2009

economics for dummies

I am indebted to The Filthy Smoker for bringing this story and this man to my attention:

Martin Barnes, CEO of DrugScope, (salary £70,000 p/a) shows the kids of today why being shit at economics is no reason not to a) earn a large salary or b) pretend you know about economics.

"The very fact that the price is falling shows how popular it is becoming."

The topic under discussion here is this alleged spiraling rise in the use of Ketamine, for which I will stick with what FS said regarding it's use:
Ketamine is a silly drug which tends to turn people into gibbering window-lickers. The drooling and the eye-rolling are temporary, I grant you, but it's not for me.

But in this situation, it could as well be the guns, butter, cloth or wine so regularly used in economics questions.

I'm going to have to read that comment by Mr Barnes again, just to make sure I haven't got it wrong:
The very fact that the price is falling shows how popular it is becoming.

It's followed on with:
"The fall in price does suggest that the people who are selling the stuff have no problems getting hold of it."

As FS has covered the tiny percentages being discussed here by a 'charity' which is in the pay of the government and also has a vested interest in making people believe there is a problem with drugs and thus a need for Mr Barnes to be paid a considerable amount, I've no need to go there.

But what I would like to point out is that Mr Barnes appears to have his Demand and Supply curves the wrong way around.

Demand is the amount of a good that buyers are willing and able to purchase at different prices:

Supply is the amount producers are willing to supply at different prices:

We find the equilibrium in a competitive market at the point they cross. Easy.

When the price of a product falls, the quantity demanded is greater (i.e a move along the demand curve with no corresponding change in supply). Out of equilibrium, of course, the lower price means that supplies produce less at that value of P and there is a demand deficit.

If demand increases, i.e a shift in the demand curve outwards then both Price and Quantity increase.

In this case of the price of Ketamine dropping by a third this to me represents either:
a) A drop in demand or
b) An increase in Supply with no corresponding increase in demand or a less than proportionate increase in demand.

Either way, unless Ketamine is a Giffen good (potatoes or value food items being the usual examples) with an upward sloping demand curve, I don't know why an increase in demand would push the price down.

If we go back to Mr Barnes' comment regarding supply we could point to point b. Given his lack of understanding of economics, however, I wouldn't trust DrugScoper to actually have any empirical evidence for this. Certainly, with Ketamine being illegal, there is no register of dealers except possibly with some nice policemen at the Vice Squad or whatever we're calling them these days. (I could actually ask one of them actually as I seem to recall a neighbour being a drug rozzer or similar).

Could it be the case that supply has increased after the drug has been made illegal? Surely the good people of Britain would not be more inclined to take something once it has been officially classed as 'forbidden'?

Either way, what seems to be the outcome - in my mind at least - of this little trip down memory lane back to the first few weeks of my economics A Level (quickly covered in one lecture during my economics degree) is that
i) I'm a better economist than Martin Barnes and
ii) DrugScope should not be in receipt of public money as they're quite clearly a waste of oxygen.

1 comment:

Mark Wadsworth said...

Nice supply-demand curves. If you re-work them slightly, that is how one 'proves' that VAT is the worst tax - it reduces output/enjoyment, it reduces price received by producer and increases price paid by consumer.