Is supply and demand a myth?

[Melendwyr]

In a monopoly, the supplier can determine the price. Right?

But if the supplier sets the price far beyond what anyone is willing to pay, no one will buy. The elimination of competition makes prices more responsive to pure demand.

"We know the worth of water when the well is dry." - Benjamin Franklin

 

[President Bush]

I am NOT wrong.

Whoa! Somebody said it again. Write it down fast before I forget: "I am NOT wrong... I am NOT wrong." I kinda like "I am not WRONG." Or "I AM NOT wrong"... maybe just "I AM NOT WRONG!"

 

[RandFan]

Responding isn't the same thing as listening.

I would NOT respond if I didn't listent. Otherwise what is the point?

Your post made it quite clear that you would not be seriously entertaining the possibility that you are wrong...

No. Unlike you, when I'm shown wrong I admit it and I appologize. You simply ignore it.

So what you claim I said and what I actually said share a single word, therefore I'm lying?

By definition to have delusions is to be delusional. It is a logical conclusion.

Stating that an argument is over is not by definition "saying" that I refuse to listen to you.

Not even a nice try.

 

[epepke]

From what I can see, it looks like Marilyn's original statement was overly strong (if it was correctly reported, which is in doubt), and that Art made some blunders in an attempt to show off a limited knowledge of academic economic theory.

If you read Marilyn's columns, you'll see that quite a lot of them are oversimplified to the point of fatuity.

 

[Q-Source]

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.

It does not matter how much the price goes up. It still goes up. Yes, you are right, the final price will depend on the elasticity of the demand for that product. Nevertheless, if costs increase, the final price still increases, that was my point.

I notice that you are confused about how the market forces work. You seem to imply that the price will have to decrease if there is no demand at higher levels. Well that is not correct. The demand has to adjust to the new equilibrium price, only those consumers who can afford a higher price will buy that product. This means that the demand also reduces, it does not stay constant as you think in your example.

Remember that producers are rational agents (they only sell products when they maximise their profits). The equilibrium price GUARANTEES this condition. This is a fact.

 

[Mark]

But if the supplier sets the price far beyond what anyone is willing to pay, no one will buy. The elimination of competition makes prices more responsive to pure demand.

"We know the worth of water when the well is dry." - Benjamin Franklin

That is absurd.

Please explain why, when satellite provided competetion, cable companies all lowered their prices to try and keep customers.

 

[Manny]

I think you're confusing his use of the term "more responsive to pure demand" with "better responsive to pure demand," Mark. You're example is separate from what he's saying, and actually kind of demonstrates it in a backwards kind of way. When cable was a monopoly, the supply curve didn't really shift all that much -- sure, ESPN would jack their rates and thus increase programming costs, but much of cable's costs are fixed. As a monopoly producer, they were free to set artificially high costs and get away with it. The only thing which would affect their pricing decision was a shift in the demand curve. People wanted more TV, cable raised its price. If there would have been a large decrease in demand, cable would have had to cut its price. In other words, price responded to demand changes, but not to supply changes as there really weren't any. (it's more complicated than that, of course, but that'll have to suffice for illustrative purposes)

Enter satellite (full disclosure: I've made a bundle off of satellite. I'm gonna name my first boat the Echostar I). Well, now you've got more than one supplier. From a monopoly to a duopoly (OK, more than that, but not a ton of competitors), and not some cozy duopoly where they work out market shares in some back room. No, DirectTV and Echostar hated cable and wanted to hurt them. So while demand for TV continues to increase, prices moderate or even come down in some cases. Which is to say, prices are responsive to both supply (which increased by a large amount) and demand (which increases along pretty much its same plodding path). Better outcome, but less "responsive to pure demand."

 

[Mark]

I think you're confusing his use of the term "more responsive to pure demand" with "better responsive to pure demand," Mark. You're example is separate from what he's saying, and actually kind of demonstrates it in a backwards kind of way. When cable was a monopoly, the supply curve didn't really shift all that much -- sure, ESPN would jack their rates and thus increase programming costs, but much of cable's costs are fixed. As a monopoly producer, they were free to set artificially high costs and get away with it. The only thing which would affect their pricing decision was a shift in the demand curve. People wanted more TV, cable raised its price. If there would have been a large decrease in demand, cable would have had to cut its price. In other words, price responded to demand changes, but not to supply changes as there really weren't any. (it's more complicated than that, of course, but that'll have to suffice for illustrative purposes)

Enter satellite (full disclosure: I've made a bundle off of satellite. I'm gonna name my first boat the Echostar I). Well, now you've got more than one supplier. From a monopoly to a duopoly (OK, more than that, but not a ton of competitors), and not some cozy duopoly where they work out market shares in some back room. No, DirectTV and Echostar hated cable and wanted to hurt them. So while demand for TV continues to increase, prices moderate or even come down in some cases. Which is to say, prices are responsive to both supply (which increased by a large amount) and demand (which increases along pretty much its same plodding path). Better outcome, but less "responsive to pure demand."

I agree with you...prices respond to both. I was responding to this sentence:

The elimination of competition makes prices more responsive to pure demand.

Which is absurd. It may apply if the product is something no one needs in any way, but mass media access is not one of those things in this modern world.

 

[RandFan]

It does not matter how much the price goes up. It still goes up. Yes, you are right, the final price will depend on the elasticity of the demand for that product. Nevertheless, if costs increase, the final price still increases, that was my point.

Sometimes markets for some products just dry up when the price rises too high. Not enough people are interested at the product at the increased price and so the price must be lowered or the inventory must be eliminated.

I notice that you are confused about how the market forces work. You seem to imply that the price will have to decrease if there is no demand at higher levels. Well that is not correct. The demand has to adjust to the new equilibrium price, only those consumers who can afford a higher price will buy that product. This means that the demand also reduces, it does not stay constant as you think in your example.

You are correct that often the market needs to adjust. But sometimes the price does need to be adjusted. I worked for a company that sold a magazine. In the mid 90's paper prices rose at unprecedented rates. To keep the price down we changed paper stocks and took other steps to keep the price down. When we eventually raised the price there was sever sticker shock and we could not move magazines. We lowered the price and were able to make a profit for a couple more years but eventually we discontinued the magazine.

My point is that there are examples where the price for a specific product must come down. However, the prices for magazines in general have increased in price since the rise in paper costs. This is the point that Art is trying to make. However there are exceptions. Some products even across the entire market just can't generate enough interest to continually raise prices. They have a name for these things, they are called "discontinued".

Remember that producers are rational agents (they only sell products when they maximize their profits). The equilibrium price GUARANTEES this condition. This is a fact.

No question. You are absolutely correct. That is the point. If the price needs to be lowered because the producer raised the price too high then he can. There are no magical equations to determine price. When I was in sales working for an import export company we would conduct market surveys and test markets. We would market the same product using different prices in different ads. The price that would result in the most units sold is the price we would set that product at. In our test markets we would never set the price below cost because that would defeat the purpose. Cost is an issue but only as to the minimum that one can charge and still make a profit. In the end the price is still determined on what the market will bear which is a combination of what the buyer is willing to pay and what the producer will accept and yes, cost does indeed influence what the producer is willing to accept which is the point that you and Art are making. In which case I agree.

 

[Manny]

I agree with you...prices respond to both. I was responding to this sentence:

The elimination of competition makes prices more responsive to pure demand.

Which is absurd. It may apply if the product is something no one needs in any way, but mass media access is not one of those things in this modern world.

Right, but it's not an absurd statement. It only seems that way because, I think, that you are reading too much into it.

In your example of cable, your analysis of the demand curve is exactly correct. Demand is high, increasing, and relatively inelastic. In a monopoly situation, that allows the provider to set a price not only above his marginal cost like other monopolists, but far above his marginal costs. But once set, it's changes in future demand which drive prices, not changes in future supply (because as a monopoly, there aren't any). That's all the guy is saying (I think).

Imagine a large demand shift downward. Say that we all got off our tucchuses and decided that a portion of our home entertainment budget would be reallocated to hiking boots and mountain bikes. Something like that would get even a monopolist's attention and move the price. In a competitive market, it might not move the price that much because the reduction in demand would be met with a reduction in supply as high-cost producers exited the market. So while in virtually all cases monopoly results in less efficiency, higher prices and less utility the statement that prices are more responsive to pure demand is true. It's true largely because there are excess profits in the system, all belonging to the one monopolist, to play with.

 

[Melendwyr]

That is absurd.

No, it's not.

When the providers of a product or service aren't forced to compete with other providers of that product or service, they can charge whatever people are willing to pay for their goods. If people can only get something they want from a single source, they'll pay up to the maximum value of those goods to get them. If the price goes above their estimation of the goods' value, they won't buy.

Once there is more than one possible source for the goods, people will purchase them from whoever offers the best deal; if the goods offered are equivalent, people will go to the lowest price.

Please explain why, when satellite provided competetion, cable companies all lowered their prices to try and keep customers.

What do you mean, 'explain'? That's a perfect example of my earlier statement. People were willing to pay a certain price for entertainment, but not an unlimited price. If the price were raised higher and higher, eventually fewer and fewer people would wish to purchase. The people who did purchase the service believed that what they were getting in return was worth at least what they were paying for it -- if they didn't, they wouldn't have bought it in the first place.

If there's competition, and one provider offers the same service for a lower price, people will get the same amount of value for less money, so they'll go to the cheaper equivalent service. Prices will tend to come down as the providers fight to attract customers - thus, the prices people pay are no longer directly tied to their desire for the product.

If I were dying of thirst, and there was only one person I could buy water from, I'd be willing to pay $100 for a gallon. If there were two people, and one charged $100 for a gallon and the other charged $1, I'd go to the guy selling for $1. My estimation of the water's value wouldn't have changed - I need it to live! - but I would go to the source with the lowest price. The guy selling for $100 would have to lower his price if he wanted to stay in business - thus, the price of water is no longer tied to the estimation of its value by the consumers.

 

[Art Vandelay]

By definition to have delusions is to be delusional. It is a logical conclusion.

That is a complete non sequitur. Mind defending the claim I am actually disputing rather than some strawman?

Stating that an argument is over is not by definition "saying" that I refuse to listen to you.

So if someone tells you that the debate is over and you have no choice to agree with them, you would in no way think this is indicative of a refusal to listen to opposing points of view?

When I was in sales working for an import export company we would conduct market surveys and test markets. We would market the same product using different prices in different ads. The price that would result in the most units sold is the price we would set that product at. In our test markets we would never set the price below cost because that would defeat the purpose. Cost is an issue but only as to the minimum that one can charge and still make a profit.

If this was your practice, then you were acting irrationally. The most important factor is maximizing profit, not maximizing units sold. And when calculating profit, you need to take cost into account.

I notice that you are confused about how the market forces work. You seem to imply that the price will have to decrease if there is no demand at higher levels. Well that is not correct. The demand has to adjust to the new equilibrium price, only those consumers who can afford a higher price will buy that product. This means that the demand also reduces, it does not stay constant as you think in your example.

While I don't want to quibble with someone who basically agrees with me, I think that it is important to note that economists draw a distinction between "demand" and "quantitiy demanded". The former is a function, while the latter is an amount. A higher price results in a lower amount demanded, but the demand stays the same.

 

[CapelDodger]

Which is absurd. It may apply if the product is something no one needs in any way, but mass media access is not one of those things in this modern world.

Mass media access is only necessary because the modern world is a result of lots of it, for many decades. There's a critical mass. Populist programmes have to be aimed at enough people that not knowing about them becomes a social handicap. (One I flaunt, but most people aren't like us).

There are, in general, two ideal prices for a monopoly product. One is absurdly high, but sells to the absurdly rich as a status-symbol. The other is lower but has a larger demand. Sometimes the higher solution involves i. Sky was never going to sell to the absurdly rich as a status-symbol.

 

[RandFan]

So if someone tells you that the debate is over and you have no choice to agree with them, you would in no way think this is indicative of a refusal to listen to opposing points of view?

But I didn't say that I had no choice to agree. I was talking smak that the debate was over. Evidence by the fact that the debate is still going on... at least it was. See my post in the other forum.

 

[Q-Source]

But sometimes the price does need to be adjusted. I worked for a company that sold a magazine. In the mid 90's paper prices rose at unprecedented rates. To keep the price down we changed paper stocks and took other steps to keep the price down. When we eventually raised the price there was sever sticker shock and we could not move magazines. We lowered the price and were able to make a profit for a couple more years but eventually we discontinued the magazine.

I understand your point but you are mixing what happens at the individual level to what happens at the general level. Yes, a single producer has to "adjust" his price up and down in order to stay in the market because as an individual he has to take market prices as given, by this I mean that the demand curve that he faces is horizontal (he cannot influence prices, unless he is a monopolist). Therefore, either he reduces his price or he is out of business.

However, at the aggregate level (which is what I've been talking about), the industry faces a downward demand, so the equilibrium price is simultaneously determined by the market force. This means that, at this level, the producers are NOT going to adjust their price up and down in order to satisfy the demand. The reason is that when supply and demand meet, the price is simultaneously determined by both forces. In other words, there is an equilibrium price where quantity demanded equals quantity supplied.


This is the equilibrium price set by the market. Individual firms for which you have worked have to take this price as given and then adjust their costs or margin of profits in order to sell. And I suppose this is the point that you are defending, but if you generalise this behaviour to the whole then you are wrong.

 

[Q-Source]

While I don't want to quibble with someone who basically agrees with me, I think that it is important to note that economists draw a distinction between "demand" and "quantitiy demanded". The former is a function, while the latter is an amount. A higher price results in a lower amount demanded, but the demand stays the same.

Of course, the supply curve moves along the demand function.

 

[Bodhi Dharma Zen]

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.

Nope. I see that you are the unreasonable one.

 

[drkitten]

If this was your practice, then you were acting irrationally. The most important factor is maximizing profit, not maximizing units sold.

Not if the company's goals include long-term as well as short-term profit. By establishing a dominant market position now (which includes maximizing units sold), the company may be able to establish a much more profitable long-term revenue stream, by raising the barrier to entry for other companies.

Think of the old Gilette strategy, before disposible safety razors became popular. The razors themselves were often priced at below cost, specifically to create a market for the Gillette blades that fit them. "Give them the razor, sell them the blades." Microsoft is using a close variation of this strategy today in their marketing of the XBox, trying to maximize the number of units sold and pre-establish a market for XBox game cartridges.

One more way in which theoretical economics fails to match the real world.

 

[RandFan]

I understand your point but you are mixing what happens at the individual level to what happens at the general level.

No, I went out of my way to distinguish between the two. I really do understand your point. I'm sorry I'm not communicating that to you. This is precisely why I said

However, the prices for magazines in general have increased in price since the rise in paper costs."

Please note the emphasised word "general".

However, at the aggregate level (which is what I've been talking about), the industry faces a downward demand, so the equilibrium price is simultaneously determined by the market force. This means that, at this level, the producers are NOT going to adjust their price up and down in order to satisfy the demand. The reason is that when supply and demand meet, the price is simultaneously determined by both forces. In other words, there is an equilibrium price where quantity demanded equals quantity supplied.

No argument whatsoever. I think perhaps you are focusing on the semantics of what I'm saying and missing my point.

This is the equilibrium price set by the market. Individual firms for which you have worked have to take this price as given and then adjust their costs or margin of profits in order to sell. And I suppose this is the point that you are defending, but if you generalise this behaviour to the whole then you are wrong.

The "whole" is but a collection of individual businesses who constantly monitor the market and adjust price to meet the needs and desires of the market. When you say the price is set by the market how does one know what the price is? There is no kelly blue book for Tylenol.

 

[Art Vandelay]

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

I never claimed that you DID bring up monopolies. Most of the times you've "proved" me wrong, you've either attacked a strawman, or simply posted non sequitors and claimed victory.

But this is proven wrong.

My opinion is proved wrong? Kinda contradicts the definition of "opinion", doesn't it?

What the market will bear is exactly what YOU say it is.

Funny, I don't recall giving a definition.

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

An example is quite different from a definition.

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

So I say that it's a misleading term, you say that I've presented an example in which you would use the term, therefore all debate is over? WTF?

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

You ask the question, but you also make it clear that you've made up your mind. Why bother asking a question when you already think you know the answer? You haven't done anything to prove that I defined "what the market will bear", the ball is still in your court. Have I provided an example of what you consider "what the market will bear"? Probably. But it's rather silly to ask me that, as only you can answer it.

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?

This is known as "poisoning the well", and indicates that the poster isn't planning on listening to anything the other person says. You present three option: agree with what you say, not respond, or post "BS". The clear implication is that you consider those the only possibilities, and you will dismiss anything I say as "BS" if I don't agree with you. It doesn't take much intelligence to read between the lines and see that what you're saying is "I've made up my mind, at I'm not going to listen to anything you have to say contrary to that".

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?

I've been trying to get you to answer that, and your failure to answer supports my contention that the term does not aid clarity.