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B. Venkatesh

ECONOMICS affects your life everyday. As a consumer, you are bothered about the price of vegetables. As a practical economist, you know that the prices depend on demand and supply for vegetables.

We learn economics from the ways of society. One such lesson is the experience of a babysitting co-operative in the US.

This co-operative issued coupons to its members. Each coupon entitled the member to hire another member for one hour of babysitting. So, if you and your wife wanted to go out for two hours, you could hire another member to baby-sit your child and "pay" him or her two coupons.

If you had more coupons, you were in a position to "spend" more babysitting hours.

Of course, you will have more coupons only if you baby-sit. After all, each member of the co-operative received equal number of coupons to start with.

The problem was this: People wanted to frequently go out on parties. So, there was heavy demand for coupons. Supply of the coupons was not enough. This demand-supply gap pushed the co-operative into "recession". Why?

Because coupons were hard to get, people did not want to "spend" what they already had. On the contrary, everybody wanted to baby-sit to earn more coupons. But since nobody was going out, the demand for babysitting declined sharply.

Realising this, the co-operative issued more coupons to its members. Now, everybody had plenty.

Eventually, that led to a different problem. People wanted to go out more frequently. But since the coupons were in plenty, nobody wanted to "earn" them. So, everyone was reluctant to baby-sit.

Think about this. If a small co-operative is unable to manage the demand-supply of its coupons, how can a country's central bank manage the demand-supply of money without any problems?

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