What's wrong here?
In the interest of enhancing the economic way of thinking, many professors encourage students to read the Wall Street Journal or other business periodicals (a passive role), while others, following Kelly , use business periodicals in a more specific way. In both instances, the objective is to inspire students to correctly apply basic economic principles to real world problems in order to make economics relevant and interesting and to increase the retention level of a conventional one-year economics course. Research by Saunders [1980, pp. 10-12] supports the importance of regular reading of business periodicals for achieving the goals.
The passive method of using business periodicals (handing out Wall Street Journal or Business Week sign up sheets and occasionally making periodic references to specific articles) is time efficient for the busy professor, but can be counterproductive unless the professor takes time to alert students to possible errors in economic reasoning that occur more frequently than is desirable in many business articles, particularly articles applying supply and demand analysis. Most students will make the assumption that the economic analysis reported in the press is correct. In those instances where journalists (or experts) apply improper economic reasoning in their reporting, the article may serve the undesired outcome of reinforcing similar errors in thinking by students reading the article. This confusion is further compounded when, in the same article, errors are reported in one segment while other arguments correctly apply economic concepts. The purpose of this article is to aid professors in using business periodicals in principles courses by presenting examples of three errors in applying supply and demand analysis that are frequently made both by students and authors of business articles.
Incorrect use of supply and demand analysis as evidenced in journalistic reports has several implications that can have adverse affects on students of professors who passively use business periodicals in introductory economics courses. First, the student who has been careful to learn the proper terminology and logic will feel uncomfortable and begin to question their own understanding when reading from someone 'professional' who has applied the concept incorrectly. Second, the student, who at the time of reading, does not fully appreciate the principle but is attempting to apply it, will unfortunately 'learn' from the incorrect presentation, and thus the article will have a negative effect on the original teaching objective. Finally, if the error made by the author is one made frequently by students, it will become harder for the student to correctly learn economic principles since the student's erroneous reasoning has been 'verified' by the journalist or the expert.
While it would be impossible for a professor to monitor even the Wall Street Journal for all cases of misreporting during a semester, the professor can make the students more sophisticated readers and hopefully avoid some of the above problems by presenting examples of typical errors of reasoning students may encounter in their outside reading. The professor can maintain a file of articles that have come to his/her attention or use available supplements that contain examples of journalistic errors applying economic reason. Some brief examples of typical errors that we have recently used effectively in our classes follow.
The first typical error involves the failure to carefully distinguish between changes in quantity demanded (quantity supplied) and changes in demand (supply). Principles of economics texts carefully distinguish between changes in quantity demanded and changes in demand. The terminology, when consistently applied, allows a reader to easily determine whether a change in buyer behavior has resulted from a change in product price or from a change in a non-price determinant of demand. Increases in demand are predicted to increase product price while increases in quantity demanded are caused by a decrease in price. Students (and others) who fail to use the terms correctly often make errors in economic reasoning. A common error: the student, using the law of demand, predicts that a decrease (increase) in price will increase (decrease) the amount of product demanded, but refers to this change as an increase (decrease) in demand. The student remembers an increase (decrease) in demand should be interpreted as a rightward (leftward) shift of the demand curve and incorrectly predicts that the change in buyer behavior will cause prices to increase (decrease).
This error is illustrated in the "Future Markets" column, 12 February 1988, p. 20, in The Wall Street Journal which focuses on the 'steady rise in coffee prices.' The Journal reports, "Increased retail demand, because of lower prices (emphasis ours) and reductions in export quotas of producing nations, has contributed to the stronger price picture..." The student, who has just finished the supply and demand chapter(s) in a principles of economics class, is presented with an example that appears to be a simple application of the tools of market analysis learned in class: an increase in demand (sic) and/or a decrease in supply should lead to an increase in the product price. Presuming that there is a single market for coffee, the student "verifies" the conclusions of the author, the increase in demand (sic) caused by a decline in price has increased prices.
Another article on the coffee market blatantly makes the same incorrect economic analysis (this time to explain a decrease in price). The journalist argues, "Coffee prices, it seems, are coming down again, after hitting a record high of $4.42 last year. An Agriculture Department economist, who had predicted $5-a-pound coffee this year, says he 'underestimated the power of the U.S. consumer movement.' Perhaps, or maybe, as with so many economists these days, he simply forgot his freshman economics, which has nothing to do with 'movements.' The coffee market is behaving the way the basic textbooks say a market behaves. Prices go up, demand falls, and prices come down." The author compounds the error by asserting it is the textbook presentation.
Editorial pages and policy reports are also good sources of errors. If students (or other readers) do not recognize these errors, when present in such writings, policies may be supported for wrong reasons or may be rejected by the reader when a correct analysis may have lead the reader to support the policy. In a review of a Cato Institute study on the effects of mandatory family-leave legislation the reviewer overstates his case by shifting demand in response to a price change. The review argues, "Industries employing more women, particularly retail and service industries, would incur higher prices 'because the cost of implementing the benefits would be higher'. The resulting decrease in demand would prompt employers to lay off workers, the majority of whom would be women." The reviewer implies the rise in price would reduce demand for the product and increase the number of women who could lose jobs as a result mandatory family leave. The professor can use supply and demand analysis to show the increase in product price in response to the increase in costs could actually help mitigate the effect of the proposed legislation on jobs.
A second error made by students and reinforced by journalists is the presumption that forces other than supply and demand affect market outcomes. In a Los Angeles Times article "'Feeding Frenzy' Engulfs Southland Home Market" discussing the rapid rise in home prices the author states, "Most industry experts describe the acceleration as a classic exercise in supply and demand. Also at play are relatively low interest rates, a strong regional economy, foreign investors, a burgeoning slow-growth movement..." The instructor can easily show how all factors 'also at play' affect price by shifting either demand or supply.
A third error that regularly appears in the press is a statement about excess demands or excess supplies that fails to consider how price changes tend to offset the predicted shortages or surpluses; the author treats supply and/or demand as a constant, not a schedule. A Milwaukee Journal headline from a 1982 article reads, "U.S. faces oversupply of doctors by 2,000." The article argues, "already there are signs the number of doctor short areas is shrinking..." and continues, quoting a Health and Human Services Department report, "'By the year 2,000 the supply of physicians is expected to be more than adequate to meet demand and could be very well in substantial excess of requirements.'" Nowhere in the article is ther any mention of how the market system causes adjustments to surpluses or shortages through price changes.
Professors who recommend that students read newspapers and business periodicals to reinforce learning of economic principles should make students fully aware of possible misreporting. Examples of typical reporting errors can make students aware and alert to possible errors and can easily be incorporated into lectures at low time cost to instructors if a file of examples is kept on hand. Failure to make students aware can lead to negative feedback for students who encounter journalistic errors, thereby leading away from targeted goals.
Students, armed with an awareness of possible errors and potential deficiencies in existing coverage can, with proper guidance, become more sophisticated and critical readers. This will not only add to their retention of economic principles, but as reported by Wood , greater incentives will be placed on journalists to provide more accurate reporting in the future.
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|Title Annotation:||use of business periodicals in teaching economics|
|Author:||Cochran, John P.; Brown, R. Michael|
|Date:||Jul 1, 1989|
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