38 ms·

1) The first two paragraphs about 'assumptions' are essentially false. There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a sna

1) The first two paragraphs about 'assumptions' are essentially false. There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a snapshot. Yes - over time supplies tend to change due to demand, of course, but that's 'long run' stuff ... not in that chart. The author is kind of misinterpreting the chart. 2) It's not 'sunk cost' that's the issue, this is about 'fixed' vs. 'unit' cost. Software is all 'fixed' (i.e. setting up the production line) whereas most material things are mostly about 'unit' costs (i.e. the cost to make an item) 3) Software sales are a tiny fraction of the economy because almost nobody is selling software. People are selling 'services', basically products that 'do stuff using software'. The 'key ingredient' is usually some type of business or experiential knowledge, not some algorithm. 4) Software development doesn't finish at v1, it's ongoing.

maxerickson 8y ago
I think the idea is that the fixed cost of failed software is (largely) sunk. You can sell a big industrial motor or fork lift that might be part of the fixed costs of running a small factory.
misja111 8y ago
Yes and there's more that is wrong in the article: "as demand for a product goes up, supply increases, and price goes down" No, when demand goes up, the price will go up as well unless supply increases by the same amount. The price will only go down when supply increases and demand doesn't keep up with it. "the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on." First of all let's skip the part about what the US did until 1999 because we're living in 2018 at the moment. And then the fact that market research, branding etc. is not included in GDP calculation has little to do with the digital age. There has always been market research and branding, not just now. One might argue that it should be included but that is really a separate topic. "It took time for the investment world to embrace companies built on intangible assets. In the early days of Microsoft, I felt like I was explaining something completely foreign to people. Our business plan involved a different way of looking at assets than investors were used to. They couldn’t imagine what returns we would generate over the long term." No doubt things were like that in the 80's. But just take a look at the most valuable Dow Jones funds now and it's clear that intangible assets are valuated well nowadays.
pjc50 8y ago
> There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a snapshot. It absolutely is an equilibrium in normal economics: https://en.wikipedia.org/wiki/History_of_microeconomics https://en.wikipedia.org/wiki/History_of_microeconomics
- JackFr 8y ago
  I think the issue is that the prose isn't clear about what 'an increase in demand' means. It can mean either a movement along the current demand curve due to a shift in the supply curve, or it can mean a shift in the demand curve, and those changes correspond to different things in the real economy.
- sonnyblarney 8y ago
  Assumption 1 from article: "demand for a product goes up, supply increases, and price goes down" Assumption 2 from article: "The second assumption this chart makes is that the total cost of production increases as supply increases. Imagine Ford releasing a new model of car. The first car costs a bit more to create, because you have to spend money designing and testing it. But each vehicle after that requires a certain amount of materials and labor. The tenth car you build costs the same to make as the 1000th car"' In assumption 1 - he's not describing how equilibrium works at all. Equilibrium is the price the market will clear at given a supply and demand curve. If 'demand goes up' - given a fixed supply demand curve ... 'price goes up'. So what the author must be referring to is some kind of market response, i.e. if demand is increasing for something, more suppliers will come along and build it, create more competition, and drive prices down. This has little to do with the Supply/Demand curve. I don't even know what assumption 2 is about, I get what he is saying but it has nothing to do with supply and demand curves. Anyhow - even if there is logic in his statements, neither assumption is drawn from the Supply and Demand curve he is showing.
  - nostrademons 8y ago
    He's referring to the static equilibrium in assumption 1. Supply & demand curves, as drawn in economic textbooks, refer to marginal supply and marginal demand. The X-axis is is quantity, so what the graph is saying is that producing 100,000 units of some good is assumed to cost more than producing 10,000 units, and similarly consumers will be more willing to buy 10,000 units than 1,000 units at a given price (the Law of Downward-Sloping Demand, for those who remember their intro microec). With assumption 2, he's saying that in software (and many other businesses now), supply curves do not necessarily slope upwards. For software, producing 100,000 units takes exactly as much money as producing 1,000 units, and can be offered at the same cost. The author (who is Bill Gates, BTW, and can be assumed to know a thing about microeconomics) only alludes to this and doesn't say it outright, but there are a number of knock-on consequences to flat supply curves that explain much of the counterintuitive properties of the tech industry but aren't well-explained by classical economics. For example, the "lottery economy" aspect (where there is one company that ends up dominating a market and the size of that company is dictated only by the size of the market) comes from zero marginal costs: once a software firm has built a solution that satisfies a market, there is nothing stopping it from expanding to serve the whole market far faster than any competitor can enter. The existence of the VC industry follows from this, because when success is binary and can't be interfered with once discovered, it makes sense to spread capital across a number of bets, hoping for a hit, rather than rationally analyze how much additional return invested capital will give in an existing business. Google & Facebook's dominance also stems from this zero-cost-of-production property. When your cost of production to provide the good or service is zero, then the only thing blocking your continued expansion is finding & convincing potential customers. With CAC forming an increasing percentage of your total marginal costs, any services that lower it or make it scale better can realize huge profits.

maxerickson 8y ago

I think the idea is that the fixed cost of failed software is (largely) sunk. You can sell a big industrial motor or fork lift that might be part of the fixed costs of running a small factory.

misja111 8y ago

Yes and there's more that is wrong in the article: "as demand for a product goes up, supply increases, and price goes down" No, when demand goes up, the price will go up as well unless supply increases by the same amount. The price will only go down when supply increases and demand doesn't keep up with it. "the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on." First of all let's skip the part about what the US did until 1999 because we're living in 2018 at the moment. And then the fact that market research, branding etc. is not included in GDP calculation has little to do with the digital age. There has always been market research and branding, not just now. One might argue that it should be included but that is really a separate topic. "It took time for the investment world to embrace companies built on intangible assets. In the early days of Microsoft, I felt like I was explaining something completely foreign to people. Our business plan involved a different way of looking at assets than investors were used to. They couldn’t imagine what returns we would generate over the long term." No doubt things were like that in the 80's. But just take a look at the most valuable Dow Jones funds now and it's clear that intangible assets are valuated well nowadays.

pjc50 8y ago

> There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a snapshot. It absolutely is an equilibrium in normal economics: https://en.wikipedia.org/wiki/History_of_microeconomics https://en.wikipedia.org/wiki/History_of_microeconomics

JackFr 8y ago
I think the issue is that the prose isn't clear about what 'an increase in demand' means. It can mean either a movement along the current demand curve due to a shift in the supply curve, or it can mean a shift in the demand curve, and those changes correspond to different things in the real economy.
sonnyblarney 8y ago
Assumption 1 from article: "demand for a product goes up, supply increases, and price goes down" Assumption 2 from article: "The second assumption this chart makes is that the total cost of production increases as supply increases. Imagine Ford releasing a new model of car. The first car costs a bit more to create, because you have to spend money designing and testing it. But each vehicle after that requires a certain amount of materials and labor. The tenth car you build costs the same to make as the 1000th car"' In assumption 1 - he's not describing how equilibrium works at all. Equilibrium is the price the market will clear at given a supply and demand curve. If 'demand goes up' - given a fixed supply demand curve ... 'price goes up'. So what the author must be referring to is some kind of market response, i.e. if demand is increasing for something, more suppliers will come along and build it, create more competition, and drive prices down. This has little to do with the Supply/Demand curve. I don't even know what assumption 2 is about, I get what he is saying but it has nothing to do with supply and demand curves. Anyhow - even if there is logic in his statements, neither assumption is drawn from the Supply and Demand curve he is showing.
- nostrademons 8y ago
  He's referring to the static equilibrium in assumption 1. Supply & demand curves, as drawn in economic textbooks, refer to marginal supply and marginal demand. The X-axis is is quantity, so what the graph is saying is that producing 100,000 units of some good is assumed to cost more than producing 10,000 units, and similarly consumers will be more willing to buy 10,000 units than 1,000 units at a given price (the Law of Downward-Sloping Demand, for those who remember their intro microec). With assumption 2, he's saying that in software (and many other businesses now), supply curves do not necessarily slope upwards. For software, producing 100,000 units takes exactly as much money as producing 1,000 units, and can be offered at the same cost. The author (who is Bill Gates, BTW, and can be assumed to know a thing about microeconomics) only alludes to this and doesn't say it outright, but there are a number of knock-on consequences to flat supply curves that explain much of the counterintuitive properties of the tech industry but aren't well-explained by classical economics. For example, the "lottery economy" aspect (where there is one company that ends up dominating a market and the size of that company is dictated only by the size of the market) comes from zero marginal costs: once a software firm has built a solution that satisfies a market, there is nothing stopping it from expanding to serve the whole market far faster than any competitor can enter. The existence of the VC industry follows from this, because when success is binary and can't be interfered with once discovered, it makes sense to spread capital across a number of bets, hoping for a hit, rather than rationally analyze how much additional return invested capital will give in an existing business. Google & Facebook's dominance also stems from this zero-cost-of-production property. When your cost of production to provide the good or service is zero, then the only thing blocking your continued expansion is finding & convincing potential customers. With CAC forming an increasing percentage of your total marginal costs, any services that lower it or make it scale better can realize huge profits.