Is supply and demand a myth?

[Art Vandelay]

It seems counter intuitive to me to use a monopoly to prove that the concept of supply and demand is a misconception? Am I missing something here?

Why, yes, you are. The original point of the thread was that cost is an important factor in price. While we were discussing that, you used the phrase "what the market will bear", which struck me as suggesting a misconception regarding economics. I presented a case as it applied to the latter, and then you asked how it would apply to the former. I then gave you an answer as to how it would apply to the former, and now you are complaining that it doesn't apply to the latter. Well, duh, of course not. You are confusing the two issues, and asking how an explanation of one position supports the other.

Furthermore, I never claimed that the concept of supply and demand is a misconception. I realize that my initial comment was rather vague and may have given that impression, but all I was saying was that "what the market will bear" is, in my opinion, a phrase that gives rise to a misleading mental image. It suggests that the final price is the place of maximum "stress" on the market, when in fact it is the opposite.

I have never said that cost is entirely irrelevant and conceded that it is a force the very start.

You seem to have done your best to imply otherwise:
"The cost of a product has nothing to do with its selling price except that the selling price must be greater than cost."
"If costs to produce the product rise then the end price of the product will only rise if the market will bear the increased costs."
"If you look at the ratio of cost and selling price for a thousand arbitrary items you will find that there is no relationship to price."
"If cost were a function of price we would expect to see some uniformity in the price to cost ratio. But any analysis of any product will demonstrate that this simply is not true."
"If it were and the price of an item were based on cost then businesses would spend billions of dollars to retrieve rocks from the Himalayas and then sell them for billions of dollars because it cost so much to get them."
"It is a demonstrable fact that cost has little bearing on the end price of a product."
"No, the cost determines the minimum price. Aside from that there is NO relationship."
"The AMOUNT of the price does not depend on the cost."
"Your price had nothing what so ever to do with the cost."
"The price is based on your profit and NOT cost."
"No [, profit] wasn't [based on cost]. It was only based on what you were willing to accept."
"No kidding, and that profit was based on what you were willing to accept and not cost."

If there is a glut of oil on the market and people are cutting back their consumption because the price of oil was high then the price of oil will fall regardless of cost, right?

Wrong. I will come back to this issue later, probably in the other thread.

Further if no one wants my widgets at above cost then I will be willing to sell them for less to cut my costs (liquidation).

There's difference between sunk costs and marginal costs. I have already pointed that out.

As much as I can get. This is often refered to as "what the market will bear" which Art says is a misconception. Do you agree that "what the market will bear" is a misconception?

If by "what the marker will bear", you mean "rational sellers sell at the highest possible price" then yes, that is a misperception. If you want to maximize the per widget price, then you should only sell some of them to keep them scarce. Furthermore, your use of "what the market will bear" implies that sellers control the price through how many they sell, but that is inaccurate. Sellers control only the price directly, and the amount sold follows from that.

RandFan

9,000,000 units sold at $1.00 per unit is "what the market will bear".
8,000,000 units sold at $2.00 per unit is "what the market will bear".

So what is "what the market can bear"? Is it an amount, or a function? Is a price, or a quantity? In your previous use, you implied that it's an amount, and a price, but now you're implying that it's a quantity, and a function. If people sell something for "what the market will bear", then "what the market will bear" must be a price. But if 9,000,000 is "what the market will bear", then "what the market will bear" must be a quantity of units. If, for any product, there is a single amount of "what the market will bear", then it's an amount. If "what the market will bear" has different values depending on something else, then it's a function. So which of these is it? You now seem to be using "what the market will bear" as some sort of lay term in place of "the demand curve". If that's what you mean, why not just use "the demand curve"?

Kevin_Lowe

Art's quoted example is bogus because it assumes a monopoly, because it assumes no fixed or inelastic costs at all (both of which you pointed out), and because it assumes a smoothly downward sloping demand curve which is an economic fantasy.

1. It's rather ridiculous to say that a study of monopolies is bogus because it assumes a monopoly. Are you saying that any study of what would happen in a monopoly is bogus? Are monopolies not a valid field of economic study?!? RandFan claimed that, in my example, cost doesn't affect price. I showed that he's wrong. I don't see what the fact that it's a monopoly has to do with it. Seems like weaselling to me.
2. Once I've decided to sell widgets, fixed costs are irrelevant to my optimal pricing. Assuming continuity (which is of course a simplification), the optimal price will always have at least one of three properties: zero marginal profit, undefined marginal profit, or boundary condition. Fixed costs don't affect marginal profit, so that leaves undefined marginal profit/boundary conditions (i.e. not selling any).
Also, I am the one that pointed out that the cost model is a simplification.
3. I specifically invited RandFan to provide his own demand curve, which he ignored. If he believes that a different demand curve would be more realistic, he should have said so. I believe that this is a simplification which does not affect my central point. RandFan basically claimed that no matter what, cost is irrelevant. By showing just one situation in which it is relevant, I proved him wrong.

Mark

But supply and demand was the least important aspect to what they were able to charge. Not non-existent, but very, very minor, since there was absolutely no competition.

Just because there is no competition, that does not mean that supply and demand are unimportant. If cable companies are acting rationally, they will maximize profits. And the optimal price will change depending on demand.

 

[Kerberos]

No, that's wrong; monopolies do have a supply curve as they'd still want to sell more of an item if its price is higher. The presence of competition changes the dynamic of it, of course.

Monopolies will tend to produce more for a higher price, but you can't draw a supply curve like with a competitive market. As Mid says. there's no uniwue relationship between price and supply since it depends on the shape of the demand kurve.

 

[American]

While supply and demand holds once stability is reached, complexity arises when government/individuals/criminals/thieves/liberals/athiests/muslims/christians/jews can't tell the difference between a want and a need.

If one goes hungry while another buys luxury cars, any one of the above groups will claim the system to be broken - ignoring the fact that the hungry could well afford the drugs that made him hungry, and (in 2005) praising his drug-use as cool and enlightened, something to be emulated by wealthy suburban kids whose parents own luxury cars.

The state of Florida considered Viagra a need for sex offenders, entitled and paid for by taxpayers.

Refer to the above list of players for someone to blame.

 

[RandFan]

The original point of the thread was that cost is an important factor in price. While we were discussing that, you used the phrase "what the market will bear", which struck me as suggesting a misconception regarding economics. I presented a case as it applied to the latter, and then you asked how it would apply to the former. I then gave you an answer as to how it would apply to the former, and now you are complaining that it doesn't apply to the latter.

Wrong, I never brought up monopolies. YOU were the one that introduced them here. Don't blame that on me.

Well, duh, of course not. You are confusing the two issues, and asking how an explanation of one position supports the other.

I NEVER brought up monopolies!

...but all I was saying was that "what the market will bear" is, in my opinion, a phrase that gives rise to a misleading mental image. It suggests that the final price is the place of maximum "stress" on the market, when in fact it is the opposite.

But this is proven wrong. You yourself state what the market will bear in your equation. Odd, don't ya think?

If by "what the marker will bear", you mean "rational sellers sell at the highest possible price" then yes, that is a misperception.

What the market will bear is exactly what YOU say it is. What the market WILL BEAR (PLEASE SEE YOUR OWN EQUATION WHERE YOU STATE : There are 10 million people in the world that like widgets, and all of them would get one if they were free. However, every increase of one dollar in the price reduces the customer base by one million. )

I worked in advertising for 8 years and I have never seen a better example of "what the market will bear".

Art,

Please pay close attention.

Any debate is over. It was over the moment you gave us a text book example of what the market would bear. You gave us a hypothetical of 10 million people. Further you told us that the market would decrease for ever dollar increase in price.

THIS IS WHAT THE MARKET WILL BEAR!!!!!!!

Art, nothing that you can say will erase the fact that you defined perfectly an example based SOLELY on what THE MARKET WILL BEAR!

Look at your own hypothetical. The market will bear --

10,000,000 at $0.00 price.
9,000,000 at $1.00 price.

Yes? No?

The math is inescapable and no amount of dancing, rhetoric or BS will EVER change the fact that you demonstrate precisly WHAT THE MARKET WILL BEAR. You can argue that cost plays a part but then I NEVER denied that.

The ball is in your court to prove that you did NOT define what the market will bear in your hypothetical. YES OR NO?

I know it is tough. It was tough when I admitted that I was arguing from ignorance. It was tough when I apologized for claiming something that you didn't assert. Now, do you have the balls to admit the obvious that your equation was a textbook example of "what the market will bear" or will you weasel out and not respond or make up some BS that no one will buy?

The ball is in your court.

Oh, and one more thing, if you honestly thinK your example isn't an example of what the market will bear then WHAT THE SAM HELL DO YOU THINK WHAT THE MARKET WILL BEAR MEANS?

 

[Abdul Alhazred]

You have clearly never been involved with the operatons of a cable company in any given city.

This is changing now that satellite has provided competition, but until then cable companies could do anything they wanted within legal guidelines which had nothing to do with S&D.

Sure they could set any price they pleased, but you still always had the option of not buying cable service at all.

This affects what price they actually charged.

 

[Mark]

Sure they could set any price they pleased, but you still always had the option of not buying cable service at all.

This affects what price they actually charged.

You missed my follow up post. S&D had an effect, just not that much.

 

[shanek]

Of course not. But supply and demand was the least important aspect to what they were able to charge. Not non-existent, but very, very minor, since there was absolutely no competition.

I agree that supply and demand is very limited in a monopolistic environment, but what else could possibly factor in to what they charge? In either case, the company is going to charge as much as they can to maximize profits, and if they charge more than that, if they have any sense, then they'll drop their price. That's the essence of supply and demand.

The only other aspect I can think of, that takes place with a monopolistic environment but not a competitive one, is that there is a greater chance that the one and only company that exists for that service will not have any sense and charge way too much to their own detriment. In a competitive market, other competitors with good sense will undercut them and they'll lose business, forcing them to cut their price or go out of business.

But other than that, I don't see how anyone can say that supply and demand doesn't exist in a monopolistic market.

 

[Art Vandelay]

Any debate is over. It was over the moment you gave us a text book example of what the market would bear.

No, the debate was over when you decided that you weren't going to listen to anything I say. You've made it quite clear that trying to reason with you is futile, and the only thing left is to show other readers that you are being unreasonable. But I think you've done quite well in that regard all by yourself.

Mark

You missed my follow up post. S&D had an effect, just not that much.

I'm not clear on what you're saying here. Are you saying the when competition was introduced, it didn't change pricing much? Doesn't that suggest that even without competititon, S&D was already having an effect?

 

[RandFan]

No, the debate was over when you decided that you weren't going to listen to anything I say.

Demonstrably untrue. And please note that when showed wrong I admitted that fact and apologized.

You've made it quite clear that trying to reason with you is futile, and the only thing left is to show other readers that you are being unreasonable. But I think you've done quite well in that regard all by yourself.

I have twice admitted when I was wrong.

1. When you demonstrated that I was arguing from ignorance.
2. When I realized (on my own) that my thread title misstated your position.

Odd way of being unreasonable.

You've made it quite clear that trying to reason with you is futile, and the only thing left is to show other readers that you are being unreasonable.

Aside from personalizing this is disingenuous. Just because I disagree with you doesn't mean that you are making reasonable arguments. Further and more important it is clear that it is you that is refusing to listen to me.

From the start I agreed that cost was a factor. I have only had one point and that is that supply and demand is a greater factor. If what the market will bear is less than cost then the company will:

Sell at a loss (liquidate at below cost)
Destroy the products (typical in food production)
Donate to charity.

In each of these situations costs was a factor because it helped the seller make a decision but a price could not be set at greater than cost. Major factor? Supply and demand.

 

[Art Vandelay]

Demonstrably untrue.

You really love that phrase, don't you? How about instead of claiming that something is demonstrably untrue, you actually demonstrate it to be untrue.

And please note that when showed wrong I admitted that fact and apologized.

Twice. There are several dozen other issues on which you have refused to accept that you are wrong.

Odd way of being unreasonable.

You know what I call someone who is sometimes unreasonable, and sometimes reasonable? Unreasonable.

Aside from personalizing this is disingenuous. Just because I disagree with you doesn't mean that you are making reasonable arguments.

Just because you disagree with me and I say that you are being reasonable, that does not mean that I am basing my accusation on your disagreement. Implying otherwise is disgenuous, and just further proves my point.

Further and more important it is clear that it is you that is refusing to listen to me.

If you're so reasonable, you can't look at that list I posted and claim that your position is clear.

From the start I agreed that cost was a factor. I have only had one point and that is that supply and demand is a greater factor.

No, you didn't. In your second post, you claimed that there is NO RELATIONSHIP.

 

[RandFan]

You really love that phrase, don't you? How about instead of claiming that something is demonstrably untrue, you actually demonstrate it to be untrue.

I can only post it. I have demonstrated it over and over again. There is not much more I can do.

Twice. There are several dozen other issues on which you have refused to accept that you are wrong.

I am NOT wrong.

You know what I call someone who is sometimes unreasonable, and sometimes reasonable? Unreasonable.

Just because I don't agree you with doesn't make me unreasonable.

Just because you disagree with me and I say that you are being reasonable, that does not mean that I am basing my accusation on your disagreement. Implying otherwise is disingenuous, and just further proves my point.

Sophistry.

If you're so reasonable, you can't look at that list I posted and claim that your position is clear.

This does not look like a logically valid statement. What do you mean? What list BTW?

No, you didn't. In your second post, you claimed that there is NO RELATIONSHIP.

I was not clear. The point of that post was to demonstrate that there is no uniformity in the ratio of price to cost. I will concede that some of my statements have not been clear. I have tried to make them clear as time goes by.

Cost is only a factor in that cost determines profit and since businesses exist to make a profit then cost must be taken into account. I accepted your equation. However in the end supply and demand are the prime factors. Just because cost is a factor in profit doesn't mean you can charge a price commensurate to cost.

Facts that I have demonstrated:

1. There is no formula that would predict the cost of a product based on price.
2. There is no ratio of price to cost.
3. There is no minimum price based on cost (except one that would determine a profit) and companies set prices below cost all of the time.
4. There is no maximum price based on cost.

Now, would you apologize and withdraw the bald face lies you told about me in this post?

 

[Art Vandelay]

Just because I don't agree you with doesn't make me unreasonable.

You say this, then I try to explain to that this is a strawman, and you post it AGAIN? It seems like every post you make is yet another piece of evidence of your unreasonableness. And you claim to be listening to me? Just because you quote my post, that doesn't mean you're responding to it.

Sophistry.

What is sophist about it?

What list BTW?

The list of all your different statements about the unimportance of cost.

Now, would you apologize and withdraw the bald face lies you told about me in this post?

Name one. (Oh, and that link goes to one of your posts, so clearly I made no statements, lies or otherwise there).

You should apologize for calling me a liar with nothing but your delusions to back it up.

 

[RandFan]

You say this, then I try to explain to that this is a strawman, and you post it AGAIN?

How is it a strawman? It is a logical statement of fact. Calling it a strawman won't change anything.

It seems like every post you make is yet another piece of evidence of your unreasonableness.

Only because you take yourself so seriously.

And you claim to be listening to me? Just because you quote my post, that doesn't mean you're responding to it.

I don't just quote you I address what you say. You are just making empty claims. You have lied repetedly and when called on it you pretend as if I didn't call you on your lies. Who ISN'T listening to who?

What is sophist about it?

Your argument assumes facts not in evidence. You simply make a claim, don't prove the claim, and then base a conclusion on that claim. Sophistry.

The list of all your different statements about the unimportance of cost.

I remember some quotes you took out of context. I also remember some bald face lies you told about me.

Name one.

This one.

RandFan has already said that he isn't going to listen to anything I have to say

This is a lie!

(Oh, and that link goes to one of your posts, so clearly I made no statements, lies or otherwise there).

That "post" contains a statement by you that is a lie. Do you really think you are the one that is looking reasonable here?

You should apologize for calling me a liar with nothing but your delusions to back it up.

Ahhh... let me get this straight, you think that I am delusional and you want me to appologize for it?

 

[Art Vandelay]

How is it a strawman? It is a logical statement of fact. Calling it a strawman won't change anything.

You implied that I was claiming that because you don't agree me, that makes you unreasonable. That is a strawman.

I don't just quote you I address what you say.

No, you don't. I just showed that you didn't. A fact that you did not address. Further proving my point.

Who ISN'T listening to who?

I'm listening to you, I just think you're full of crap.

Your argument assumes facts not in evidence.

What facts?

You simply make a claim, don't prove the claim, and then base a conclusion on that claim.

Pot, kettle.
What claim did I make?

This one. This is a lie!

It's my interpretation of your declaration that the debate is over.

Ahhh... let me get this straight, you think that I am delusional and you want me to appologize for it?

More dishonesty from you. I never said any such thing. I said that you should apologize for your accusations of lying. A bit hypocritical to accuse me of lying, then misrepresent my position, eh?

 

[Roboramma]

While supply and demand holds once stability is reached, complexity arises when government/individuals/criminals/thieves/liberals/athiests/muslims/christians/jews can't tell the difference between a want and a need.

Personally I blame everything on the individuals.

 

[RandFan]

You implied that I was claiming that because you don't agree me, that makes you unreasonable.

That is what you said.

No, you don't. I just showed that you didn't. A fact that you did not address. Further proving my point.

Yes I do, no you didn't.

I'm listening to you, I just think you're full of crap.

Likewise.

It's my interpretation of your declaration that the debate is over.

BS. That I think the debate is over does NOT mean that I won't listen to you. Never has, never will. Not once did I refuse to respond, not once. Saying that the debate is over does not translate into a refusal to listen.

More dishonesty from you. I never said any such thing. I said that you should apologize for your accusations of lying.

??? You are truly amazing to claim something that is so easy to prove.

Art
You should apologize for calling me a liar with nothing but your delusions to back it up.

RandFan
...you think that I am delusional and you want me to appologize for it

A person who has delusions is by definition delusional. Duh!

A bit hypocritical to accuse me of lying, then misrepresent my position, eh?

You said "delusions", sorry dude but you have been caught lying again.

 

[Mark]

No, the debate was over when you decided that you weren't going to listen to anything I say. You've made it quite clear that trying to reason with you is futile, and the only thing left is to show other readers that you are being unreasonable. But I think you've done quite well in that regard all by yourself.

MarkI'm not clear on what you're saying here. Are you saying the when competition was introduced, it didn't change pricing much? Doesn't that suggest that even without competititon, S&D was already having an effect?

I am saying that when real competition was introduced, the price went down.

 

[Q-Source]

I'm having a debate with Art Vandelay in this thread over in the Science forum. The OP takes Marilyn Vos Savant to task for declaring "the cost of a product has nothing to do with its selling price."

In a way both of you are right when you defend your arguments but also are wrong in your reasons to attack your opponent’s point of view.

In perfect competition, the equilibrium price and quantity are set SIMULTANEOUSLY by the market force of supply and demand. In other words QS=QD at price P.

S and D are supply and demand functions, each of them depending on a price that maximises the producer’s profit and consumer’s utility. Let's concentrate only on the producers function since the contention here is whether or not they can affect prices, a simplified version of their function is:

Q= f( costs, p) This means that the quantity supplied by the producers depends on their production costs and a price given by the market. However if we clear for p, we can express this function as:

p= f( costs, Q) So, yes. Producers can affect prices through production costs and quantity supplied. For example, a change in production costs is going to shift the supplied curve up and down along the demand curve. Something like this, but up instead of down http://upload.wikimedia.org/wikipedia/en/8/8b/Supply_curve_shift.png

A real example is fuel, oil is an important component of total costs for many firms (let’s say airlines), a rise in oil prices is going to increase costs and reduce the quantity supplied. Obviously prices will have to go up.

So in this respect Art Vandelay is completely right.

But as I said before, RanFan is also right, why?, because the price can only move along the demand curve. Although the price is going to go up if costs increase, they will be constrained by the consumers demand. The final (equilibrium) price will be set simultaneously by both forces.

The reasoning works similar with imperfect competition. Although the price is decided by monopolists, this is also constrainted by demand.

 

[RandFan]

In a way both of you are right when you defend your arguments but also are wrong in your reasons to attack your opponent’s point of view.
In perfect competition, the equilibrium price and quantity are set SIMULTANEOUSLY by the market forces of supply and demand. In other words QS=QD at price P.

S and D are supply and demand functions, each of them depending on a price that maximises the producer’s profit and consumer’s utility. If we only concentrated on the producers function since the contention here is whether or not they can affect prices, a simplified version of this is:

Q= f( costs, p) This means that the quantity supplied by the producers depends on their production costs and a price given by the market. However if we clear for p, we can express this function as:

p= f( costs, Q) So, yes. Producers can affect prices through production costs and quantity supplied. For example, a change in production costs is going to shift the supplied curve up and down along the demand curve. Something like this, but up instead of down http://upload.wikimedia.org/wikipedia/en/8/8b/Supply_curve_shift.png

A real example is fuel, oil is an important component of total costs for many firms (let’s say airlines), a rise in oil prices is going to increase costs and reduce the quantity supplied. Obviously prices will have to go up.

Depends on how high the prices go up. Depends on the market for those goods. If there is a product where the market will not bear an increase in price then the producer of that product or services then the producer will have to make cuts elsewhere or go bust. I'm an insurance inspector and auditor. My clients have told me that they will not increase payments to cover transportation costs because my competition is holding steady at this moment. If oil prices remain high or continue to rise then those prices will change OR the insurance companies might dertermine that it is not cost effective to audit many policies. But yes, I have always admitted that cost can influence price.

So in this respect Art Vandelay is completely right.

I respectfully disagree only with the point noted.

But as I said before, RanFan is also right, why?, because the price can only move along the demand curve. Although the price is going to go up if costs increase, they will be constrained by the consumers demand. The final (equilibrium) price will be set simultaneously by both forces.

The reasoning works similar with imperfect competition, although the price is decided by monopolists, this is also constrainted by demand.

Fair enough. I will stipulate to this. I wonder if we could get Art to agree?

 

[Art Vandelay]

That is what you said.

Where? Quote me.

BS. That I think the debate is over does NOT mean that I won't listen to you. Never has, never will. Not once did I refuse to respond, not once. Saying that the debate is over does not translate into a refusal to listen.

Responding isn't the same thing as listening. Your post made it quite clear that you would not be seriously entertaining the possibility that you are wrong, and anyone in their right mind would agree. A debate is when two people offer arguments on an issue. To say that the debate is over is to say that there are no more arguments to be made.

You said "delusions", sorry dude but you have been caught lying again.

So what you claim I said and what I actually said share a single word, therefore I'm lying? I did not say what you said. YOU LIED. Admit it.