Economic Intuition

A conversation this week demonstrated once again how otherwise smart people do not understand or intuit the principles of supply and demand.

I and two other educated people were talking about getting a college education, and how with the bad economy, more people wanted to going to school. This increase in demand, one person thought, would decrease the price of tuition. The other person seemed to agree. I smiled. More people seeking a particular service make that service less expensive? That's exactly backwards.

Perhaps they assume that with increased demand comes an even bigger increase in supply. But there's no rule that says that is the case. Increasing supply, takes time, and in this case, some significant fixed costs (buildings, etc.) That cannot be implemented over night. The near term result of more people wanting to go to school is going to be higher tuition.