5 ms·

> If demand is highly inelastic - as would be expected for something like culinary preferences Demand curves, regardless of elasticity, are always downward slo

by nanis 4y ago

> If demand is highly inelastic - as would be expected for something like culinary preferences Demand curves, regardless of elasticity, are always downward sloping: Higher prices lead to fewer units demanded. Your statement implies control over prices: Firms with market power do not operate along the inelastic portion of a demand curve. This is a logical implication of profit maximization. Before one can understand that, one must internalize the fact that as a seller, you cannot choose the price and the quantity sold independently. If you pick a price, you can sell the quantity demanded at that price. If it is too high, can't sell any. If you pick quantity, you can only sell all at a price people are willing to pay. Assume a firm has market power (can pick price) and is operating along the inelastic portion of the demand curve. If it charges a higher price, it loses some sales, but total revenue increases (that's what demand being inelastic means -- quantity sold falls, but percentagewise not as much as you increased the price, therefore, revenue, price x quantity increases). In addition, because cost is increasing in quantity (offering more for sale costs you more) and now you are producing less, costs go down. Therefore, profit, which is revenue minus cost, must increase. Therefore, if you were operating along the inelastic portion of the demand curve, you could not have been maximizing profits. Therefore, firms with market power (can pick price) can only operate along the elastic portion of the demand curve. If you are claiming demand for horse meat is a vertical straight line (which is not a thing outside of being a limiting case in econ 101), then lower demand means demand curves closer to x axis origin, i.e., price is determined simply by the supply curve. With a given supply curve (which are always positively sloped due to the fact that cost is increasing in output), lower demand means lower equilibrium price, > then price actually has to increase when demand is low. Demand falling cannot cause higher prices (keeping everything else constant).

wjnc 4y ago
Those sweet economists. (I’ve got my MSc in Economics ;) First off: Giffen and Veblen goods? Second off: while I’m all for the theoretical models and would even defend that institutional evolution would lead to markets representing theoretical IO markets … a local horse butcher in a Dutch town is not a profit maximizing entity. He’s got sticky and human relations on his supply side, sticky and human relations on his demand side and a finite time horizon in which the butcher takes pride in the job and firm. Ever hear seniors complain about prices rising in small stores? Store owners take that into account. Marginal local stores bordering on bankruptcy tell you that. He picks prices because all things considering that price makes sense to him.
- nanis 4y ago
  > Those sweet economists. (I’ve got my MSc in Economics ;) > Giffen and Veblen goods? Let me know when you find one. Grazing grounds for the perpetually counter-example starved. > I’m all for the theoretical models Nothing theoretical about what I said: Simple logic. Your claim is that Dutch butchers would prefer to leave free money on the table?
  - wjnc 4y ago
    Yes, I believe that every (small) shop or store leaves money on the table all the time. The best I can give you is somewhat optimizing some of the time with long perturbations. A function of social relationships on all sides, Excel [1], one-shot pricing, bounded rationality and myopia, endowment effects etc. If you look at the economic performance of firms within sectors you’ll see massive diversity in value added. That’s pretty much proof that business leave money on the table. Other example is the way inflation winds it’s way through pricing. It’s rocky and uneven. Anyone whose ever seen a business in operation will agree it’s satisficing not optimizing. [1] Excel explains why large companies retain lots of efficiencies. Nature of the firm debate points to all kinds of relative efficiencies, which I happily applaud.
tsimionescu 4y ago
Demand for things like horse meat is limited. Even if a butcher gave it out for free, they wouldn't be able to "sell" as much horse meat as chicken meat, at least not for human consumption. So, when you realize you're already selling the maximum possible amount of your good, you're only option to increase profit is to increase your prices. If your market reduces even further (say, 10% of the people buying your horse meat die of old age), you will often have to increase price even more to try to keep the profit you were making. Especially with goods like meat, where the supply side is also inelastic (you can't produce half a horse, you butcher a whole horse or you don't butcher it at all). For niche culinary products, this type of extremely limited market can actually exist. I'd bet if you were allowed to sell mouse meat, you would quickly get to know every single person in London who wants to eat mouse meat. Of course, I'm not claiming that demand will not be reduced by price. You can't charge a million dollars per kilo of horse meat. But you also can't expect to increase sales volume for certain niche goods past a point, regardless of price. Edit: this is also often visible in the price of seasonal specialties. For example, in my country, lamb is only commonly eaten for Easter. So, demand for lamb spikes around Easter every year. But, lamb prices actually drop around Easter (at least for consumers) - the rest of the year, lamb is only sold at high prices for the few people who consider it a delicacy. But around Easter, as demand increases for cultural reasons, competing on price starts making sense and price drops just as demand rises.
- nanis 4y ago
  > So, demand for lamb spikes around Easter every year. But, lamb prices actually drop around Easter (at least for consumers) So, you don't think everyone involved in the chain of getting that lamb to you, anticipating the shift in the demand curve that occurs very predictably, don't ensure that they have the highest possible supply during that time? You forgot the "keeping everything else constant" and changes in quantity demanded in response to just the price of the good versus changes in the shape and location of the market demand and supply curves.
  - tsimionescu 4y ago
    Of course supply is adapted to anticipate this well known change in demand. But the driver for all of these is a culinary tradition causing a spike in demand*, it's not the other way around. Either way, my only point is that since markets have special characteristics that make them unintuitive from a basic supply-demand analysis. Too many people assume the most basic models of basic economics are enough, and ignore things like supply and demand elasticity, and the fact that supply or demand may be constrained by non-economic factors. I also tend to think the laws of supply and demand are useful as a descriptive model, but lack predictive power for many goods, since the factors above can't be estimated in blind - you have to actually see what people happen to do, and then come up with a model for elasticity to make the supply-demand curves fit the actual observations, you can't do it the other way around. *To be fair, it may well be that the original tradition was caused by a natural change in supply, with sheep giving birth at the beginning of spring, so having edible lamb by mid spring when Easter (and the pre-Christian celebrations it replaced) haken; but even then, that was not an economic change, it was a biological reality.

by nanis 4y ago

wjnc 4y ago

Those sweet economists. (I’ve got my MSc in Economics ;) First off: Giffen and Veblen goods? Second off: while I’m all for the theoretical models and would even defend that institutional evolution would lead to markets representing theoretical IO markets … a local horse butcher in a Dutch town is not a profit maximizing entity. He’s got sticky and human relations on his supply side, sticky and human relations on his demand side and a finite time horizon in which the butcher takes pride in the job and firm. Ever hear seniors complain about prices rising in small stores? Store owners take that into account. Marginal local stores bordering on bankruptcy tell you that. He picks prices because all things considering that price makes sense to him.

nanis 4y ago
> Those sweet economists. (I’ve got my MSc in Economics ;) > Giffen and Veblen goods? Let me know when you find one. Grazing grounds for the perpetually counter-example starved. > I’m all for the theoretical models Nothing theoretical about what I said: Simple logic. Your claim is that Dutch butchers would prefer to leave free money on the table?
- wjnc 4y ago
  Yes, I believe that every (small) shop or store leaves money on the table all the time. The best I can give you is somewhat optimizing some of the time with long perturbations. A function of social relationships on all sides, Excel [1], one-shot pricing, bounded rationality and myopia, endowment effects etc. If you look at the economic performance of firms within sectors you’ll see massive diversity in value added. That’s pretty much proof that business leave money on the table. Other example is the way inflation winds it’s way through pricing. It’s rocky and uneven. Anyone whose ever seen a business in operation will agree it’s satisficing not optimizing. [1] Excel explains why large companies retain lots of efficiencies. Nature of the firm debate points to all kinds of relative efficiencies, which I happily applaud.

tsimionescu 4y ago

Demand for things like horse meat is limited. Even if a butcher gave it out for free, they wouldn't be able to "sell" as much horse meat as chicken meat, at least not for human consumption. So, when you realize you're already selling the maximum possible amount of your good, you're only option to increase profit is to increase your prices. If your market reduces even further (say, 10% of the people buying your horse meat die of old age), you will often have to increase price even more to try to keep the profit you were making. Especially with goods like meat, where the supply side is also inelastic (you can't produce half a horse, you butcher a whole horse or you don't butcher it at all). For niche culinary products, this type of extremely limited market can actually exist. I'd bet if you were allowed to sell mouse meat, you would quickly get to know every single person in London who wants to eat mouse meat. Of course, I'm not claiming that demand will not be reduced by price. You can't charge a million dollars per kilo of horse meat. But you also can't expect to increase sales volume for certain niche goods past a point, regardless of price. Edit: this is also often visible in the price of seasonal specialties. For example, in my country, lamb is only commonly eaten for Easter. So, demand for lamb spikes around Easter every year. But, lamb prices actually drop around Easter (at least for consumers) - the rest of the year, lamb is only sold at high prices for the few people who consider it a delicacy. But around Easter, as demand increases for cultural reasons, competing on price starts making sense and price drops just as demand rises.

nanis 4y ago
> So, demand for lamb spikes around Easter every year. But, lamb prices actually drop around Easter (at least for consumers) So, you don't think everyone involved in the chain of getting that lamb to you, anticipating the shift in the demand curve that occurs very predictably, don't ensure that they have the highest possible supply during that time? You forgot the "keeping everything else constant" and changes in quantity demanded in response to just the price of the good versus changes in the shape and location of the market demand and supply curves.
- tsimionescu 4y ago
  Of course supply is adapted to anticipate this well known change in demand. But the driver for all of these is a culinary tradition causing a spike in demand*, it's not the other way around. Either way, my only point is that since markets have special characteristics that make them unintuitive from a basic supply-demand analysis. Too many people assume the most basic models of basic economics are enough, and ignore things like supply and demand elasticity, and the fact that supply or demand may be constrained by non-economic factors. I also tend to think the laws of supply and demand are useful as a descriptive model, but lack predictive power for many goods, since the factors above can't be estimated in blind - you have to actually see what people happen to do, and then come up with a model for elasticity to make the supply-demand curves fit the actual observations, you can't do it the other way around. *To be fair, it may well be that the original tradition was caused by a natural change in supply, with sheep giving birth at the beginning of spring, so having edible lamb by mid spring when Easter (and the pre-Christian celebrations it replaced) haken; but even then, that was not an economic change, it was a biological reality.