3 ms·

In school I was thought: with lower demands, come lower prices

marcosdumay 6y ago
Somebody failed to communicate you the big picture. Usually, prices are higher if the demand is consistently lower. But that's not a certainty. Anyway, production and consumption are in (near) equilibrium, and the price is the communication channel that brings that (near) equilibrium. That doesn't imply in any price level, it's only a communication channel, where both sides input their preferences and settle on some value. The actual value depends on what are both sides preferences.
andrewf 6y ago
Lower demand would be a shift from D2 back to D1 on this chart: https://en.wikipedia.org/wiki/Supply_and_demand#/media/File:Supply-and-demand.svg https://en.wikipedia.org/wiki/Supply_and_demand#/media/File:... But if the demand curve shifts leftwards or downwards enough, it won't intersect with the supply curve at all. At that point, the model says commerce halts because there's no price that both sellers and buyers are willing to trade at.
dsr_ 6y ago
You left out a part: For commodity goods, lowering the demand will lower the price towards the marginal cost of production. A commodity good is interchangeable: you don't care whether you buy a bushel of winter wheat from Farmer A or Farmer B. A commodity good is produced by many entities and desired by many entities. Some goods are not commodities but are substitutable: when AMD made pin-compatible 386 and 486 processors, you didn't care much about whether a 40MHz 386 came from Intel or AMD, which is why AMD's lower prices let them build their marketshare substantially. If a widget isn't being produced at all, just sitting in a warehouse, the price can easily be governed by: - the person who needs a hundred of them vs the warehouse that would like to no longer pay an inventory tax on the 110 in stock - the broker who knows where the last hundred widgets are stored, and has figured out customers who really need them in ones and tens - the warehouse that thinks it has all the remaining widgets in the world, and advertises them at a high price to see if anybody wants them

Somebody failed to communicate you the big picture. Usually, prices are higher if the demand is consistently lower. But that's not a certainty. Anyway, production and consumption are in (near) equilibrium, and the price is the communication channel that brings that (near) equilibrium. That doesn't imply in any price level, it's only a communication channel, where both sides input their preferences and settle on some value. The actual value depends on what are both sides preferences.

andrewf 6y ago

Lower demand would be a shift from D2 back to D1 on this chart: https://en.wikipedia.org/wiki/Supply_and_demand#/media/File:Supply-and-demand.svg https://en.wikipedia.org/wiki/Supply_and_demand#/media/File:... But if the demand curve shifts leftwards or downwards enough, it won't intersect with the supply curve at all. At that point, the model says commerce halts because there's no price that both sellers and buyers are willing to trade at.

dsr_ 6y ago

You left out a part: For commodity goods, lowering the demand will lower the price towards the marginal cost of production. A commodity good is interchangeable: you don't care whether you buy a bushel of winter wheat from Farmer A or Farmer B. A commodity good is produced by many entities and desired by many entities. Some goods are not commodities but are substitutable: when AMD made pin-compatible 386 and 486 processors, you didn't care much about whether a 40MHz 386 came from Intel or AMD, which is why AMD's lower prices let them build their marketshare substantially. If a widget isn't being produced at all, just sitting in a warehouse, the price can easily be governed by: - the person who needs a hundred of them vs the warehouse that would like to no longer pay an inventory tax on the 110 in stock - the broker who knows where the last hundred widgets are stored, and has figured out customers who really need them in ones and tens - the warehouse that thinks it has all the remaining widgets in the world, and advertises them at a high price to see if anybody wants them