EclectEcon

Politicians who have tried to make a name for themselves by attacking price gougers commit several economic errors. One of the errors involves the implicit assumption that demand curves are vertical. They seem to believe that when prices go up, consumers do not change their purchasing patterns at all. This assumption is clearly wrong, and yet it persists, as noted in this piece by Steve Horowitz about gasoline pricing at a convenience store (cited by King Banaian):

The owner of [a] store ... reports that over the weekend when his price was at $3.80, his sales dropped significantly. He sold 1358 gallons on 9/2, 738 gallons on 9/3, and 429 gallons on 9/4. This was also Labor Day weekend, when lots of car travel happens. His sales didn't reach 1000 gallons again until 9/9. So the result of his supposed "price gouging?" A drop in sales! Gasp!! Demand curves slope downward after all! As the owner says in his defense "why would I purposely gouge somebody and watch my sales drop?"

The response from the AG's spokesman: "Consumers paid a markup over the three days. They had to pay the retail price he asked, and they did." They "had to pay" it? Evidently they did not, given the drop in sales the owner saw. Yes, he's located out in the country, but his price was so out of line with other prices that many consumers (gasp again!) found another retailer that weekend. Some chose to buy there, of course, but it's not like they had a gun to their head or no other options (there are 3 very competitive gas stations 7 or 8 miles down the road in my town). Notice how the AG's office treats consumers as passive victims, even though the evidence clearly shows they made active choices in the face of high prices.

Be sure to read the entire piece for all the background and details.

One would think politicians could have a positive marginal physical product in some other activity and forget about cases like this, where their marginal physical product is clearly negative.

Update: For more evidence that higher prices lead to a reduction in the quantity demanded, see James Hamilton's recent piece on gasoline markets.