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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

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.
- partiallypro 8y ago
  > 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. I'm not sure what you mean, this is 100% covered in general economic theory with barriers to entry. > 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 But it's actually not 0 or even close to it. There are still economies of scale at play, if Facebook were to lose millions of users their costs would grow per user, which is what a marginal cost curve represents. Just because the curve is different doesn't mean it doesn't exist. I'm pretty disappointed with Gate's post, because every academic economist I know is mocking it...since it's not well represented or thought out. It ignores so many principles and theories in economics for the sake of being "ground breaking." Even though most of the theories are hundreds of years old and still apply completely.

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.

partiallypro 8y ago
> 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. I'm not sure what you mean, this is 100% covered in general economic theory with barriers to entry. > 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 But it's actually not 0 or even close to it. There are still economies of scale at play, if Facebook were to lose millions of users their costs would grow per user, which is what a marginal cost curve represents. Just because the curve is different doesn't mean it doesn't exist. I'm pretty disappointed with Gate's post, because every academic economist I know is mocking it...since it's not well represented or thought out. It ignores so many principles and theories in economics for the sake of being "ground breaking." Even though most of the theories are hundreds of years old and still apply completely.