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I think his straw man for supply and demand is off. Higher demand doesn’t create lower prices. Lower prices creates “more quantity demanded” at a given level.

I think his straw man for supply and demand is off. Higher demand doesn’t create lower prices. Lower prices creates “more quantity demanded” at a given level. If demand increases, then prices and quantity both go up. This may be semantics, but it isn’t like economics completely falls apart. Similarly, economics is able to handle products with high fixed and low marginal costs. (Natural monopolies) I suspect he gave this book review assignment to an intern that majored in something besides CS, business or Econ.

occamrazor 8y ago
I think he just wrote “demand” instead of “price” in that sentence.
deleted 8y ago
[deleted]
grosjona 8y ago
>> ... as demand for a product goes up, supply increases, and price goes down I think it is fine but confusing because it skips over some steps. A longer version might be: ... as demand for a product goes up, the demanded quantity goes up, which causes supply to increase (to meet the higher demanded quantity) which then pulls the price down (due to the increased size of the market and competition). The net effect of this is decreased price overall due to economies of scale (since the total production volume of the product in the market is now higher).
BoiledCabbage 8y ago
That's bothered me before. It really seems like economists flipped their axes on a basic supply demand curve. They discuss it as if price is the independent variable and quantity (demanded or supplied) is the dependent, and yet any 9th grader would be marked down for putting their independent variable on the "y-axis". It amazes me how something generally accepted as wrong stays that way.
- grosjona 8y ago
  I had the same thought. Also, I'm not even sure that this diagram makes sense overall because supply, demand and price are so tightly interconnected (with feedback loops in both directions) that it doesn't make sense to separate them like this.
  - losvedir 8y ago
    > Also, I'm not even sure that this diagram makes sense overall because supply, demand and price are so tightly interconnected (with feedback loops in both directions) that it doesn't make sense to separate them like this. How so? Econ major here, and I agree the axes should be swapped, but I don't follow your other point.
    - grosjona 8y ago
      Why is it that when the price drops, consumers would want to buy more and producers would necessarily want to produce less? If I was a company director and the price of the commodity that I produced dropped by a lot, I would work harder to produce more of the commodity to offset the lower profit margins; that way I could earn the same bonus at the end of the year in order to make the payment for the mortgage on my yacht. Also in the case of cryptocurrencies, it doesn't seem to work the way the graph suggests; when the price goes up, people buy more.
      - losvedir 8y ago
        Ah, I think you have the same misconception as Gates in the post, of confusing the concepts of "points along the curve" with the curve itself. > Why is it that when the price drops, consumers would want to buy more and producers would necessarily want to produce less? I would phrase it as when the price is lower, there are more consumers who would buy, and fewer producers to sell. To take the demand curve, for example, it doesn't explain one person's behavior at different prices. Rather, think of the curve as a thousand points, each representing a different person and their own maximum price at which they would buy the item. The supply curve is a thousand producers each with the minimum price they'd be willing to operate at. > If I was a company director and the price of the commodity that I produced dropped by a lot, I would work harder to produce more of the commodity to offset the lower profit margin Yes, this is already reflected in the supply curve. If your company is able and willing to produce that commodity at a lower price, you're already reflected on the supply curve as one of the points on the line below the current equilibrium price. You have what's called a "producer surplus" if you'd be willing to produce at a lower price than the equilibrium. Take the supply of uber drivers for example. If the price of rides decreases, you may to some extent see drivers adjusting how much they drive, but the main effect is to remove drivers from the market who have better uses of their time, less efficient cars, etc. Similarly, if the price increases you'll see new uber drivers coming online driving their clunky SUVs or whatever. Or, in the case of cryptocurrency, the supply follows this as well: at a higher price, less efficient miners or people in locations with higher utility prices will be able to profitably mine, and so the number of people supplying computation will increase. > Also in the case of cryptocurrencies, it doesn't seem to work the way the graph suggests; when the price goes up, people buy more. This, too, works with the supply and demand curves, when you understand them properly. The concept at work, here, is that changing supply or demand (i.e. think of the thousands of people that make up each curve shifting their preferences in the aggregate) represents shifts of the curve, not movements along it. Increased demand is the curve shifting up and/or to the right (it's the same thing). So, when the price goes up, people see it in the news and have FOMO and so "demand increases", meaning the curve shifts to the right. If you look at the graph again, you'll see that means the equilibrium price increases, which is what's happening. That, in turn, drives more breathless speculation and aggregate demand increases again, pushing the curve further to the right, driving up the price some more. Concept check: the supply curve is not shifting, here. Per my earlier paragraph, the increasing price may mean more miners come online, but that's already what the supply curve means. A shift in the supply curve would be something like a new breakthrough energy technology making everyone's utilities cheaper. That means if everyone's minimum price before was $x, they're now willing to supply computation at $x + 5, shifting the supply curve to the right and (if you check the diagram) driving down the equilibrium price (since the # of bitcoins in circulation will increase faster and the demanded fee by the miner's will be less).
MoBattah 8y ago
>I suspect he gave this book review assignment to an intern that majored in something besides CS, business or Econ. I was under the impression the Gates Notes were written by him, wrong?
- mathattack 8y ago
  So did I. But usually they’re better written. (Though he’s made stats and econometrics mistakes in the past - see his writing on small school sizes)
blanderman 8y ago
More quantity demanded = more quantity produced = better economies of scale, in theory https://en.wikipedia.org/wiki/Supply_and_demand https://en.wikipedia.org/wiki/Supply_and_demand
Nasrudith 8y ago
There is a lot wrong with the supply and demand description including lack of elasticity and scalability as a factor. Software is the extreme end of scalability. One good lesser example is manufacturing vs repair. As mass production took off in the time it took to repair one item a worker could make ten new. Wasting some material on defectives made more sense than repairing them usually unless the cost of failure is extra high, inspections more expensive or a more cautious approach yielded better viable output. It is only when the expense of new is high that repair remains intrinsically viable (if you enjoy repairing things economics don't matter as it is its own reward). If fixed per unit costs are high extra supply does little good - especially if it is durable. You won't be able to buy $100 for $99.

occamrazor 8y ago

I think he just wrote “demand” instead of “price” in that sentence.

deleted 8y ago

[deleted]

grosjona 8y ago

>> ... as demand for a product goes up, supply increases, and price goes down I think it is fine but confusing because it skips over some steps. A longer version might be: ... as demand for a product goes up, the demanded quantity goes up, which causes supply to increase (to meet the higher demanded quantity) which then pulls the price down (due to the increased size of the market and competition). The net effect of this is decreased price overall due to economies of scale (since the total production volume of the product in the market is now higher).

BoiledCabbage 8y ago

That's bothered me before. It really seems like economists flipped their axes on a basic supply demand curve. They discuss it as if price is the independent variable and quantity (demanded or supplied) is the dependent, and yet any 9th grader would be marked down for putting their independent variable on the "y-axis". It amazes me how something generally accepted as wrong stays that way.

grosjona 8y ago
I had the same thought. Also, I'm not even sure that this diagram makes sense overall because supply, demand and price are so tightly interconnected (with feedback loops in both directions) that it doesn't make sense to separate them like this.
- losvedir 8y ago
  > Also, I'm not even sure that this diagram makes sense overall because supply, demand and price are so tightly interconnected (with feedback loops in both directions) that it doesn't make sense to separate them like this. How so? Econ major here, and I agree the axes should be swapped, but I don't follow your other point.
  - grosjona 8y ago
    Why is it that when the price drops, consumers would want to buy more and producers would necessarily want to produce less? If I was a company director and the price of the commodity that I produced dropped by a lot, I would work harder to produce more of the commodity to offset the lower profit margins; that way I could earn the same bonus at the end of the year in order to make the payment for the mortgage on my yacht. Also in the case of cryptocurrencies, it doesn't seem to work the way the graph suggests; when the price goes up, people buy more.
    - losvedir 8y ago
      Ah, I think you have the same misconception as Gates in the post, of confusing the concepts of "points along the curve" with the curve itself. > Why is it that when the price drops, consumers would want to buy more and producers would necessarily want to produce less? I would phrase it as when the price is lower, there are more consumers who would buy, and fewer producers to sell. To take the demand curve, for example, it doesn't explain one person's behavior at different prices. Rather, think of the curve as a thousand points, each representing a different person and their own maximum price at which they would buy the item. The supply curve is a thousand producers each with the minimum price they'd be willing to operate at. > If I was a company director and the price of the commodity that I produced dropped by a lot, I would work harder to produce more of the commodity to offset the lower profit margin Yes, this is already reflected in the supply curve. If your company is able and willing to produce that commodity at a lower price, you're already reflected on the supply curve as one of the points on the line below the current equilibrium price. You have what's called a "producer surplus" if you'd be willing to produce at a lower price than the equilibrium. Take the supply of uber drivers for example. If the price of rides decreases, you may to some extent see drivers adjusting how much they drive, but the main effect is to remove drivers from the market who have better uses of their time, less efficient cars, etc. Similarly, if the price increases you'll see new uber drivers coming online driving their clunky SUVs or whatever. Or, in the case of cryptocurrency, the supply follows this as well: at a higher price, less efficient miners or people in locations with higher utility prices will be able to profitably mine, and so the number of people supplying computation will increase. > Also in the case of cryptocurrencies, it doesn't seem to work the way the graph suggests; when the price goes up, people buy more. This, too, works with the supply and demand curves, when you understand them properly. The concept at work, here, is that changing supply or demand (i.e. think of the thousands of people that make up each curve shifting their preferences in the aggregate) represents shifts of the curve, not movements along it. Increased demand is the curve shifting up and/or to the right (it's the same thing). So, when the price goes up, people see it in the news and have FOMO and so "demand increases", meaning the curve shifts to the right. If you look at the graph again, you'll see that means the equilibrium price increases, which is what's happening. That, in turn, drives more breathless speculation and aggregate demand increases again, pushing the curve further to the right, driving up the price some more. Concept check: the supply curve is not shifting, here. Per my earlier paragraph, the increasing price may mean more miners come online, but that's already what the supply curve means. A shift in the supply curve would be something like a new breakthrough energy technology making everyone's utilities cheaper. That means if everyone's minimum price before was $x, they're now willing to supply computation at $x + 5, shifting the supply curve to the right and (if you check the diagram) driving down the equilibrium price (since the # of bitcoins in circulation will increase faster and the demanded fee by the miner's will be less).

MoBattah 8y ago

>I suspect he gave this book review assignment to an intern that majored in something besides CS, business or Econ. I was under the impression the Gates Notes were written by him, wrong?

mathattack 8y ago
So did I. But usually they’re better written. (Though he’s made stats and econometrics mistakes in the past - see his writing on small school sizes)

blanderman 8y ago

More quantity demanded = more quantity produced = better economies of scale, in theory https://en.wikipedia.org/wiki/Supply_and_demand https://en.wikipedia.org/wiki/Supply_and_demand

Nasrudith 8y ago

There is a lot wrong with the supply and demand description including lack of elasticity and scalability as a factor. Software is the extreme end of scalability. One good lesser example is manufacturing vs repair. As mass production took off in the time it took to repair one item a worker could make ten new. Wasting some material on defectives made more sense than repairing them usually unless the cost of failure is extra high, inspections more expensive or a more cautious approach yielded better viable output. It is only when the expense of new is high that repair remains intrinsically viable (if you enjoy repairing things economics don't matter as it is its own reward). If fixed per unit costs are high extra supply does little good - especially if it is durable. You won't be able to buy $100 for $99.