Chapter 6

Price Controls

WHAT GOOD IS ECONOMICS?

Long before now, you will probably have thought: Why bother with economics? In fact, some of you may have thrown this book aside. If so, get it back: we’ll see in this chapter how econom-

ic theory helps us analyze policy issues.

1.	“Prices are too high.” What do you think this common	?
	complaint means?
2.	“Wages are too low.” How does this frequent statement

relate to the previous complaint?

INTERFERENCE WITH THE MARKET

“Gasoline prices are outrageous: why not compel the oil companies to sell more cheaply? After all, they make vast sums in profit: it’s not as if cutting their gains will send their stockholders to the poorhouse.”

What will happen if, say, gasoline prices are lowered from $1.30 per gallon (the market price) to $1.00 per gallon? At the market price, every buyer can find a seller; and every seller a buyer.

105

106 An Introduction to Economic Reasoning

Can you see from our previous chapters why this is true? One way to show this appeals to a special type of argument called a reductio. In a reductio, we assume that the contradictory of what we want to prove is true. We then show that this hypothesis leads to a contradiction. If so, the contradictory of our original hypothesis is true.

Confused? You should be. Let’s have another look:

(1)We want to prove statement p.

(2)We show that not -p leads to a contradiction.

(3)This proves that p is true.

?1. What principle of logic does a reductio proof depend on?

Chapter 6: Price Control 107

WHAT IF BUYERS AND SELLERS DON’T MATCH?

We can use a reductio proof to show that at the market price, every buyer finds a seller and every seller a buyer. Suppose that at the market price of gasoline, $1.30 per gallon, there are more buyers than sellers (not-p). More people want to buy gasoline at that price than can be supplied. What will happen?

Obviously, the buyers will scramble to try to get the gasoline. This is why when there are “price wars” among gas stations, you usually have to wait in long lines. You will not be surprised to learn that people do not like to wait in line. Some buyers will then offer a higher price.

What happens at the new offer? Fewer buyers will want gasoline at the higher price but more sellers will be willing to offer gasoline for purchase. Eventually, supply and demand will balance.

1.Extra-credit: which buyers will bid up the price?

2.“The analysis given in the text does not work. In most market transactions, buyers do not offer a price. The seller sets the price. Unless the seller increases prices, then,

	prices will not rise.” What’s wrong with this objection?	?
	Show:
	(a) why the alleged fact that buyers do not
	raise prices is false;
	(b) why even if the alleged fact were true,
	the conclusion would not follow.
3.	Super-extra credit. Is the argument given in the text a strict
	reductio proof or just analogous to such a proof? If you can
	answer this question you are probably a ringer.

108 An Introduction to Economic Reasoning

A BASIC RULE OF ECONOMICS

I have good news for you. If you have found the discussion of reductio proof confusing, you can understand the fundamental economic principal without explicit reference to it. All you have to remember is this: if there are more buyers than sellers at a given price, the price will rise; if there are more sellers than buyers at a given price, the price will fall. The market tends to balance buyers and sellers.

MARGINAL BUYERS AND SELLERS

All right: if there are more buyers than sellers, buyers will bid up the price (just to keep your hand in, state the analogous proposition that is true when there are more sellers than buyers).

But which buyers will do this? Obviously, economic theory cannot identify the specific buyers who will do this: it does not tell you that John Jones or John Elway will bid up the price.

?	1.	Why not? Recall the discussion in an earlier chapter about
		praxeology. Economic theory deals in general proposi-
		tions, not propositions about specific people. In economic
		history, we apply the general truths to specific situations
		by “filling in the blanks.” We thus use theory to help us
		understand history; but history and theory are very differ-
		ent things.

MARGINAL BUYERS AND SELLERS, CONTINUED

Economic theory, though, can tell us something about which buyers will bid up the price. Let’s suppose that the price of gasoline is $1.00 per gallon and, at this price, more buyers than sellers exist.