Think Like an Economist: Marginal Vs. Total Thinking

Lynne Kiesling

I will apologize in advance to Sturt for the fact that I am going to use his comment on my recent Australian wine post to illustrate a crucially important point about economic logic:

It’s overstating it to suggest that the Australian winegrape industry exists purely because of subsidies. Winegrapes are an ag commodity like any other, and in Australia production responds more closely to the interaction of supply and demand than in nearly any other grape growing country.

In this comment Sturt misinterprets my claim because he is not using marginal logic. If you apply marginal logic to that original post, it should be pretty clear that the idea is that at the margin, other things equal, the presence of subsidies induced more people to establish wineries (or to expand capacity at existing wineries) than would have done so in the absence of the subsidies. That incremental increase shifted out the supply curve, and with either a stationary demand curve or a demand curve that is shifting out less than the magnitude of the supply shift, that increase will result in an increase in wine quantities and a decrease in wine prices.

I offer this as a cautionary note to all. Economics is a body of analysis that rests on marginal logic, on incremental change. If you fail to reflect that in your analyses, you will make mistaken arguments.

OK, back out of professor mode …