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> The basic law of economics It's not a law. It's a model. A very simple model. Of a very complex system. Computer Scientists never invoke Turing machines or

> The basic law of economics It's not a law. It's a model. A very simple model. Of a very complex system. Computer Scientists never invoke Turing machines or the simply typed lambda calculus in debates about specific pieces of hardware or compiler implementations, except in cases where those models are actually applicable and in ways that comport with the pieces of those systems for which the model is usefully faithful. The Econ 101 "supply & demand curve" is way simpler than TMs/lambda calculi, AND it's modeling a much more complex system than a computer/compiler. Yet, somehow, the model is constantly invoked. There's a really good reason that every single financial analyst in the world goes directly to "pricing power" whenever they are asked to analyze the effect of "supply chains".

mannerheim 5y ago
GGP said the price is only determined by how much people are willing to pay. This is obviously false. If the cost of producing a product rises above the current price, even if the price people are willing to pay doesn't change, the price has to increase or else the business will start losing money.
- ncmncm 5y ago
  And, sometimes the business starts losing money. We saw that when oil prices went below many producers' extraction cost. They continued selling at the lower price, because they had to service existing debt, and accumulated more debt until the price went back up.
  - skeeter2020 5y ago
    This is also known as the "Groupon Business Model of Imminent Failure". Cash today is way more important than accounts receivable.
  - Ekaros 5y ago
    Also sometimes supply or production is inelastic and not possible to scale down and up. Thus to have chance to generate money in future they had to accept loss now.
  - mannerheim 5y ago
    My understanding with respect to the oil industry is that they have relatively high capital costs, and lower marginal costs. If prices drop so that they become unprofitable, it still makes sense to drill because the fixed costs are already sunk. It could also make sense if you expect the low prices to be a temporary situation, and shutting down and restarting would be expensive. Either way, producing at a loss is not sustainable in the long run, so without costs falling or prices increasing, they would eventually go out of business. This isn't really a factor for Arizona, since as a brand, not a commodity, they can set their price, and since they're cheaper than many of their competitors, they have room to work with here, too. If their unit cost is higher than their unit price, they don't expect costs to decrease, and they don't intend to raise their price, they would simply make more money by not making the product.
- jjeaff 5y ago
  They will never raise the price higher than people are willing to pay or else they won't sell the product at all. Sometimes they will sell at a loss temporarily and sometimes they will just sell off all remaining product at the highest amount people are willing to pay. Even if at a loss because getting something is better than the product sitting on shelves. Some products are sold at a loss permanently as a loss leader. Like hot dogs or roast chicken at Costco.
  - Jensson 5y ago
    > They will never raise the price higher than people are willing to pay or else they won't sell the product at all That isn't true, at least for some definition of "people". They will raise the prices until selling is profitable even if most people aren't willing to pay that, since there will be some who want the product more who pay the premium. If it was profitable to sell for the lower price they probably would make more money thanks to higher volume though, which is why they had the price originally. Supply vs demand isn't always right, but it is closer to right than wrong in most cases. You can look at profit margins to see how well supply/demand works in a specific field, in software supply/demand doesn't exist no. But in most fields profit margins doesn't look like that, they are sub 10% meaning that for every 10 dollars you pay less than 1 dollar goes as profits and the rest goes to pay for the service you bought, that wouldn't be true if prices usually followed what people are willing to pay instead of being a mix of supply/demand.
  - mannerheim 5y ago
    Different people have different prices they're willing to pay for a product. That's the theory behind a demand curve. And in reality, if they raise the price to $1.29 or $1.49, there will still be people buying it. If the unit cost of Arizona tea ever went above the unit price, it simply would not make sense to continue manufacturing the product and selling it at that price, outside of contractual obligations. Loss leaders are a different analysis, and in order for that to work, Arizona would have to convince all retailers to sell the product at a loss; Costco's business is not selling hot dogs or rotisserie chicken, and that's why they can afford a loss on those. Even these, they still put in a lot of work to keep costs low (e.g., making the hot dogs themselves instead of buying from Hebrew National), so the loss in recent years has been either small, or they break even. But obviously even this isn't something that could be kept up forever, given long run trends in inflation; the purchasing power of a dollar was ten times greater in 1950, and if in 2090 they keep selling hot dogs for $1.50 when a comparable meal costs $15, it might make sense to have a Costco membership just for hot dogs and rotisserie chickens (unless they set the membership cost so high that it's unrealistic to recoup the cost in a year without, e.g., eating there every single day), and at that point their loss leader just becomes a loss. One final note I'll make is that average hourly earnings over the last couple decades have outpaced the rise in prices for most goods, even as the price of services outpace average hourly earnings; intuitively, the former should make sense, since with improved technology, the same good requires less labour to make. So food has gotten cheaper in real terms over the last few decades, as has shipping, while the opposite effect happens with services because of Baumol's cost disease. Because of this, even with inflation, more efficient products has somewhat blunted the impact on these manufacturers' costs, even though they too will one day have to increase their prices as well.
Kranar 5y ago
Laws in the sciences are all components of models. Newton's three laws are a component of Newtonian mechanics, so are the laws of thermodynamics. Arguing semantics about what a law is is the least interesting aspect of this discussion, with that said you are free to use whatever term you want but should at least be familiar that in general the term law of supply, law of demand, and that much of economics uses the term law to codify a set of common observations that are used as the basis for further derivations: [1] https://en.wikipedia.org/wiki/Law_of_demand https://en.wikipedia.org/wiki/Law_of_demand [2] https://en.wikipedia.org/wiki/Law_of_supply https://en.wikipedia.org/wiki/Law_of_supply [3] https://en.wikipedia.org/wiki/Category:Economics_laws https://en.wikipedia.org/wiki/Category:Economics_laws
- thwayunion 5y ago
  The important difference I'm commenting on is that engineers and physicists rarely get confused about when Newtonian mechanics or thermodynamics are useful models. Even when they do, their "belief" in these laws is not taken as religious or political. Beliefs in models are quickly dispelled when it becomes obvious that the model is too wrong to be useful. I rarely see economists invoke Econ 101 models such as [1],[2] except in extraordinarily constrained settings. If you aren't invoking theorems about beta reduction for the simply typed lambda calculus to reason about C's memory model, then consider also refraining from using [1],[2] to analyze pretty much anything in a real economic system. This isn't pedantic. This is a real difference in how engineers and software people treat laws in the natural sciences vs how laws get treated in economics by the same set. You can call it a law, or a model, or whatever. The point -- and, not a pedantic one -- is that [1],[2] are almost never accurate enough to be useful and calling them laws doesn't change that fact.
  - JulianWasTaken 5y ago
    I'm no expert myself, but my layman's understanding of some of the pushback behavioral economics has for the field of economics is relevant for your point. Specifically, from what I've seen, behavioral economics precisely wishes to reject predicting behavior via these simple economic models in favor of more nuanced understandings of complex behaviors, derivable only through empirical observation of what consumers really do, not what they should do or a simplistic law predicts they should do. (It's an interesting comparison to CS too.)
itsoktocry 5y ago
- thwayunion 5y ago
  Thank you. This post perfectly demonstrations my observation. I have never seen a physicist get viscerally frustrated because he knows some small minority of folks who use Newtonian mechanics in regimes where most other physicists concur it's a bad model.
rhacker 5y ago
This is so true. The problem is that the price people are willing to pay can go to really, REALLY high for some items because there really is no alternative. (Cars, Wood/Housing, Raw materials like steel)
- skeeter2020 5y ago
  you're talking about price elasticity and the role of substitutes, for which economists also have simple models that always get over-applied :)
  - eurasiantiger 5y ago
    Theories in economics are not falsifiable, thus economics is not hard science. Some would argue it’s not science at all, since it provides no objective information.
    - mushbino 5y ago
      Economics is inseparable from political economy. It's entirely ideology driven and in no way scientific.
    - seanp2k2 5y ago
      It’s fun to look up economists opinions on markets, since you can almost always find opposing views. It’s like the weather people, where there’s no downside to being wrong.

mannerheim 5y ago

GGP said the price is only determined by how much people are willing to pay. This is obviously false. If the cost of producing a product rises above the current price, even if the price people are willing to pay doesn't change, the price has to increase or else the business will start losing money.

ncmncm 5y ago
And, sometimes the business starts losing money. We saw that when oil prices went below many producers' extraction cost. They continued selling at the lower price, because they had to service existing debt, and accumulated more debt until the price went back up.
- skeeter2020 5y ago
  This is also known as the "Groupon Business Model of Imminent Failure". Cash today is way more important than accounts receivable.
- Ekaros 5y ago
  Also sometimes supply or production is inelastic and not possible to scale down and up. Thus to have chance to generate money in future they had to accept loss now.
- mannerheim 5y ago
  My understanding with respect to the oil industry is that they have relatively high capital costs, and lower marginal costs. If prices drop so that they become unprofitable, it still makes sense to drill because the fixed costs are already sunk. It could also make sense if you expect the low prices to be a temporary situation, and shutting down and restarting would be expensive. Either way, producing at a loss is not sustainable in the long run, so without costs falling or prices increasing, they would eventually go out of business. This isn't really a factor for Arizona, since as a brand, not a commodity, they can set their price, and since they're cheaper than many of their competitors, they have room to work with here, too. If their unit cost is higher than their unit price, they don't expect costs to decrease, and they don't intend to raise their price, they would simply make more money by not making the product.
jjeaff 5y ago
They will never raise the price higher than people are willing to pay or else they won't sell the product at all. Sometimes they will sell at a loss temporarily and sometimes they will just sell off all remaining product at the highest amount people are willing to pay. Even if at a loss because getting something is better than the product sitting on shelves. Some products are sold at a loss permanently as a loss leader. Like hot dogs or roast chicken at Costco.
- Jensson 5y ago
  > They will never raise the price higher than people are willing to pay or else they won't sell the product at all That isn't true, at least for some definition of "people". They will raise the prices until selling is profitable even if most people aren't willing to pay that, since there will be some who want the product more who pay the premium. If it was profitable to sell for the lower price they probably would make more money thanks to higher volume though, which is why they had the price originally. Supply vs demand isn't always right, but it is closer to right than wrong in most cases. You can look at profit margins to see how well supply/demand works in a specific field, in software supply/demand doesn't exist no. But in most fields profit margins doesn't look like that, they are sub 10% meaning that for every 10 dollars you pay less than 1 dollar goes as profits and the rest goes to pay for the service you bought, that wouldn't be true if prices usually followed what people are willing to pay instead of being a mix of supply/demand.
- mannerheim 5y ago
  Different people have different prices they're willing to pay for a product. That's the theory behind a demand curve. And in reality, if they raise the price to $1.29 or $1.49, there will still be people buying it. If the unit cost of Arizona tea ever went above the unit price, it simply would not make sense to continue manufacturing the product and selling it at that price, outside of contractual obligations. Loss leaders are a different analysis, and in order for that to work, Arizona would have to convince all retailers to sell the product at a loss; Costco's business is not selling hot dogs or rotisserie chicken, and that's why they can afford a loss on those. Even these, they still put in a lot of work to keep costs low (e.g., making the hot dogs themselves instead of buying from Hebrew National), so the loss in recent years has been either small, or they break even. But obviously even this isn't something that could be kept up forever, given long run trends in inflation; the purchasing power of a dollar was ten times greater in 1950, and if in 2090 they keep selling hot dogs for $1.50 when a comparable meal costs $15, it might make sense to have a Costco membership just for hot dogs and rotisserie chickens (unless they set the membership cost so high that it's unrealistic to recoup the cost in a year without, e.g., eating there every single day), and at that point their loss leader just becomes a loss. One final note I'll make is that average hourly earnings over the last couple decades have outpaced the rise in prices for most goods, even as the price of services outpace average hourly earnings; intuitively, the former should make sense, since with improved technology, the same good requires less labour to make. So food has gotten cheaper in real terms over the last few decades, as has shipping, while the opposite effect happens with services because of Baumol's cost disease. Because of this, even with inflation, more efficient products has somewhat blunted the impact on these manufacturers' costs, even though they too will one day have to increase their prices as well.

Kranar 5y ago

Laws in the sciences are all components of models. Newton's three laws are a component of Newtonian mechanics, so are the laws of thermodynamics. Arguing semantics about what a law is is the least interesting aspect of this discussion, with that said you are free to use whatever term you want but should at least be familiar that in general the term law of supply, law of demand, and that much of economics uses the term law to codify a set of common observations that are used as the basis for further derivations: [1] https://en.wikipedia.org/wiki/Law_of_demand https://en.wikipedia.org/wiki/Law_of_demand [2] https://en.wikipedia.org/wiki/Law_of_supply https://en.wikipedia.org/wiki/Law_of_supply [3] https://en.wikipedia.org/wiki/Category:Economics_laws https://en.wikipedia.org/wiki/Category:Economics_laws

thwayunion 5y ago
The important difference I'm commenting on is that engineers and physicists rarely get confused about when Newtonian mechanics or thermodynamics are useful models. Even when they do, their "belief" in these laws is not taken as religious or political. Beliefs in models are quickly dispelled when it becomes obvious that the model is too wrong to be useful. I rarely see economists invoke Econ 101 models such as [1],[2] except in extraordinarily constrained settings. If you aren't invoking theorems about beta reduction for the simply typed lambda calculus to reason about C's memory model, then consider also refraining from using [1],[2] to analyze pretty much anything in a real economic system. This isn't pedantic. This is a real difference in how engineers and software people treat laws in the natural sciences vs how laws get treated in economics by the same set. You can call it a law, or a model, or whatever. The point -- and, not a pedantic one -- is that [1],[2] are almost never accurate enough to be useful and calling them laws doesn't change that fact.
- JulianWasTaken 5y ago
  I'm no expert myself, but my layman's understanding of some of the pushback behavioral economics has for the field of economics is relevant for your point. Specifically, from what I've seen, behavioral economics precisely wishes to reject predicting behavior via these simple economic models in favor of more nuanced understandings of complex behaviors, derivable only through empirical observation of what consumers really do, not what they should do or a simplistic law predicts they should do. (It's an interesting comparison to CS too.)

itsoktocry 5y ago

thwayunion 5y ago
Thank you. This post perfectly demonstrations my observation. I have never seen a physicist get viscerally frustrated because he knows some small minority of folks who use Newtonian mechanics in regimes where most other physicists concur it's a bad model.

rhacker 5y ago

This is so true. The problem is that the price people are willing to pay can go to really, REALLY high for some items because there really is no alternative. (Cars, Wood/Housing, Raw materials like steel)

skeeter2020 5y ago
you're talking about price elasticity and the role of substitutes, for which economists also have simple models that always get over-applied :)
- eurasiantiger 5y ago
  Theories in economics are not falsifiable, thus economics is not hard science. Some would argue it’s not science at all, since it provides no objective information.
  - mushbino 5y ago
    Economics is inseparable from political economy. It's entirely ideology driven and in no way scientific.
  - seanp2k2 5y ago
    It’s fun to look up economists opinions on markets, since you can almost always find opposing views. It’s like the weather people, where there’s no downside to being wrong.