The Supply/Demand Graph, Episode #4

The Graph Screen shot 2015-08-19 at 12.17.36 PM

Crash Course’s explanation of Supply and Demand is pretty spot on.  Most economic schools (all but Marxism as far as I know) agree that the equilibrium price is reached where the demand and supply curves meet.  The demand curve is determined by how much money buyers would be willing to pay for a product, and the supply curve is determined by how cheap of a price sellers would sell a product.

Marxists, however, believe in the Labor Theory of Value, and would probably reject the the graph entirely.  The Labor Theory of Value states that a product’s value is determined by the amount of labor required to produce it, so if a product takes someone 1 hour to make and a different product takes 5 hours, then the second product must be more economically valuable.

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(courtesy of SMBC Comics)

Government Subsidies

Crash Course notes correctly that the concept of “fairness” or “the right price” is subjective and is not based in economics:

Some people might want to talk about a price being fair or right, but that all depends on your point of view.  The buyer always considers a low price to be a fair price, while the seller considers it unfair and vise versa.  In general economists don’t really like to push opinions about prices.  Voluntary exchange suggests that the price is there for a reason.

However, immediately after this, they input a little bit of their personal bias when they argue against government subsidies for business who are hurting because of low demand:

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For example, assume the demand for strawberries inexplicably falls, so the demand curve shifts to the left, and the equilibrium price and quantity fall.  Farmers might go to the government for assistance, but most economists argue there is no reason to bail them out.  The market has spoken: strawberries are so over.

While I agree with their position, it’s little awkward to give a policy position immediately after saying that economists don’t like to push opinions.  As I’ve noted previously, the market sometimes shifts jobs from one industry to another, and those who argue in favor of corporate subsidies are usually ones the who are afraid of having to change jobs.

But economists are correct in saying that the government should not bail out industries, because it would do a net harm to the population generally, even if it helps a sector.  Crash Course acknowledges this when they say:

If the government helps the farmers by giving them a subsidy, it would be putting resources toward something that society doesn’t value.  That would be inefficient.

Here I do wish Adriene would have mentioned what the most efficient way to use the resources would be: by not taking it from people in the first place.  Since the market (i.e. people spending their own money freely) is the most efficient method of choosing what society wants, why do resources need to be taken from the market in the first place?

The Circular Flow of Products, Resources, and Money

How do goods, money, and resources circulate between individuals, business, and government? Crash Course explains it and uses this graph to represent the circular flow:

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Notice anything strange in this illustration?

Both households and businesses give and receive in the cycle, since people receive money (which are used to buy goods) for their labor, and businesses receive labor for the money the pay to their employees.

Government, however, only gives money in this graph.  Since government does not create wealth (it only takes and redistributes it), the graph is missing the arrows of money going from households and businesses to the government (i.e. taxes).

I’m not the only one who noticed the error in this graph.  Josh, a fan and commenter of CCC, mentioned this in the comments of the previous article:

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Nice catch Josh.

To be fair, Crash Course does mention taxation when explaining the graph, however:

Screen shot 2015-08-08 at 4.11.00 PMWhere does the government get the money?  Well, they get some of it from taxing households and businesses, and they get some of it from borrowing, but we’ll talk about that later.

Maybe because the government gets its money from both taxation and borrowing, they did not want to include any representation of the inflow of money before explaining borrowing.  This is the only explanation I can think of.

While Crash Course’s illustration does contain a clear error, it is not as crude as economist Paul Krugman’s illustration, which he presented to his Econ 348 students at Princeton:

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In Krugman’s example, people just pass money back and forth to each other.  The exchange element is completely missing.

Episode #2 in Review: Specialization and Trade

Crash Course’s second episode was pretty agreeable.  It explained why free trade is mutually beneficial, gave a good explanation of the Production Possibilities Frontier, and it even knocked down common political arguments that are demonstrably false.  Let’s start with their explanation of specialization.

Specialization is a Pizzeria?

pizzaCrash Course gives a visualization of specialization with the analogy of a pizza-making assembly line.  I hope that this example is effective for those unfamiliar with specialization, but what I was thinking when I saw this was “couldn’t each of these guys very easily switch to a different position at the pizzeria without much fuss?  Is the guy cutting vegetables really that much better at doing this task than anyone else?”  I wasn’t sure if this example was advocating for specialization or just an assembly line business model.


Their best example comes from showing what one person would have to do to make a pizza by himself.  This is a modern take on Leonard Read’s I, Pencil, and it gets the point across faster even than it would take you to read Read’s short essay.

National Trade


Understanding the Production Possibilities Frontier is challenging.  They explained the model quickly, and although I was able to follow along in real time, I needed to pause the video after this segment to visualize and absorb the lesson again in my head.

Their conclusion from the model was direct:

You might hear a politician or someone on the news argue that international trade destroys domestic jobs, and even though it may seem counterintuitive, economists for centuries have argued that trade is mutually beneficial to whoever is trading.

To be fair though, international trade may destroy particular domestic jobs, but not the total number of jobs.  In Crash Course’s example, the American shoe industry would suffer as a result of free trade, and the airplane industry would grow.  People hate making less money or getting laid off, even if you explain to them that the economy is better off for it.  Just ask the cab industry.

Let’s go back to that final line: trade is mutually beneficial to whoever is trading.  While true, it’s important to compare this statement to the opposite argument: trade is a zero-sum game where one party wins and the other loses.

There are a fair amount of people who believe that as people get rich, these people are necessarily making others poorer (the money has to come from somewhere right?).  With the exception of thieves, who actually do increase their wealth at the expense of someone else’s wealth, people get rich because a lot of other people have wanted to trade with them.  Bill Gates is not rich because people are poor, he’s rich because a lot of people value his products more than holding on to cash.

The episode gave two good examples of the national benefits of free trade: Japan and Taiwan.  While these examples are good, Japan and Taiwan also have a fair amount of natural resources, and Japan has historically been a developed country.  Instead of these examples, I would look at Hong Kong and Singapore.  These countries are closer to the size of a city, with very few natural resources, and just 60 years ago would be considered poor underdeveloped countries.  But from decades of free trade policies (they are currently #1 and #2 most economically free countries in the world), these tiny countries now have a greater GDP per capita than the European Union’s average.

Not much objection in this week’s episode, and we even have a teaser of next week:

Next time we’ll show you how some of these ideas get turned into economic systems, and how these systems contribute to differences between countries.

Looking forward to hearing about Venezuela.