6 ms·

> Your products are in demand and there are buyers who are willing to pay more than the theoretical market price. What does this even mean? How can buyers be w

by rcme 4y ago

> Your products are in demand and there are buyers who are willing to pay more than the theoretical market price. What does this even mean? How can buyers be willing to pay more than the market price and the sellers still make more money? If such a case were to occur, it wouldn't be correct to call the old price the "theoretical market price." Basically, what you're describing is literally inflation: the purchasing power of money has decreased, so people are willing to spend more of it to buy their goods. Sellers recognize that the demand curve has shifted, and raise their price accordingly.

deleted 4y ago
[deleted]
swatcoder 4y ago
I think the OP is suggesting that there’s a “natural” market price that was perturbed by an extraordinary and temporary event, but that skewed/irrational customer perceptions and market inefficiencies let current sellers milk that perturbation for longer than the original disruption would theoretically warrant. And that this behavior can become a ratcheting change that drives price inflation entirely through profit-taking. I’m sure there’s developed economic theory around this phenomenon and more sophisticated language than they used, but it felt like they got the point across.
- skissane 4y ago
  > I’m sure there’s developed economic theory around this phenomenon and more sophisticated language than they used, but it felt like they got the point across. Isn’t this what economists call “elasticity”?
- rcme 4y ago
  That doesn’t really make sense. Raising prices not supported by demand would result in less profit in theory. For instance, prices may go up in a supply disruption, but the loss in sales means suppliers earn less. So if prices were artificially high, it would actually be more profitable to lower them.
  - naasking 4y ago
    They wouldn't lose sales on necessary staples like eggs, milk and such, all of which have seen significant increases.
    - rcme 4y ago
      Demand for milk and eggs is definitely elastic. And we're seeing inflation in other goods that aren't staples as well.
      - candiodari 4y ago
        Not at the price points they're at. If milk halved in price, would milk consumption significantly rise? Not at all. So yes, milk consumption is price elastic, but not at these prices. They're too low. Same goes for eggs, bread, ...
        rcme 4y ago
        I could definitely see milk consumption increasing if prices were lower. Tons of products use cheap fats that could use butter instead if it were cheaper. If milk products were cheap enough, you could use it as animal feed. If it was really cheap you could burn it for energy. Also worth noting is that the dairy industry is subsidized by the government, so the amount of milk being consumed is already higher than you would expect if the price was set at the market price. For eggs, similar things could occur. Soy lecithin is a common emulsifier, but could be replaced by egg lecithin if eggs were cheaper than soy.
- abigail95 4y ago
  the theory and evidence behind it shows the opposite, "sticky prices" are usually always sticky in one direction. wages is the biggest one, very hard to decrease wages but very easy to increase. consumer goods are the same, it's easy to discount your stock to sell it - but if you raise it you have to deal with "price gouging" and "profiteering" and "causing inflation".
ThreeBeanPizza 4y ago
The answer to the question of paying above market price is market power. When firms have market power beyond perfect competition they adjust prices above the theoretical competitive level where marginal cost = price. A change in supply generally, ie shrinking, gives firms more market power to charge higher prices => inflation. Intrest rates really don't touch market power so it is pretty fair to criticize interest rake hikes as a solution here. Intrest rate hikes also slow down business investment which makes supply less responsive. But it REALY depends on the market. If you are importing a lot of goods from compaies with a lot of market power right now, ex: oil, your domestic government and the fed of your country can't do much to fight inflation other then to tamp down economic activity overall with interest rate. What is really the issue is government policy to combat inflation has fallen by the wayside since feds are more responsive.
- rcme 4y ago
  > Intrest rate hikes also slow down business investment which makes supply less responsive. That's kind of a simplification. Interest rates affect business investment. But many kinds of business investments are just "business" for other companies. E.g. when TSMC invests in building a new chip fab, they buy EUV systems from ASML. ASML uses that money to pay their suppliers and employees, etc. Also, interest rates affect real estate prices, which affects real estate development, which is a big source of employment. Government debt is also more expensive, so high interest rates also apply downward pressure on government spending. I agree that there's too much market consolidation, and that isn't impacted much by interest rates.

by rcme 4y ago

deleted 4y ago

[deleted]

swatcoder 4y ago

I think the OP is suggesting that there’s a “natural” market price that was perturbed by an extraordinary and temporary event, but that skewed/irrational customer perceptions and market inefficiencies let current sellers milk that perturbation for longer than the original disruption would theoretically warrant. And that this behavior can become a ratcheting change that drives price inflation entirely through profit-taking. I’m sure there’s developed economic theory around this phenomenon and more sophisticated language than they used, but it felt like they got the point across.

skissane 4y ago
> I’m sure there’s developed economic theory around this phenomenon and more sophisticated language than they used, but it felt like they got the point across. Isn’t this what economists call “elasticity”?
rcme 4y ago
That doesn’t really make sense. Raising prices not supported by demand would result in less profit in theory. For instance, prices may go up in a supply disruption, but the loss in sales means suppliers earn less. So if prices were artificially high, it would actually be more profitable to lower them.
- naasking 4y ago
  They wouldn't lose sales on necessary staples like eggs, milk and such, all of which have seen significant increases.
  - rcme 4y ago
    Demand for milk and eggs is definitely elastic. And we're seeing inflation in other goods that aren't staples as well.
    - candiodari 4y ago
      Not at the price points they're at. If milk halved in price, would milk consumption significantly rise? Not at all. So yes, milk consumption is price elastic, but not at these prices. They're too low. Same goes for eggs, bread, ...
      - rcme 4y ago
        I could definitely see milk consumption increasing if prices were lower. Tons of products use cheap fats that could use butter instead if it were cheaper. If milk products were cheap enough, you could use it as animal feed. If it was really cheap you could burn it for energy. Also worth noting is that the dairy industry is subsidized by the government, so the amount of milk being consumed is already higher than you would expect if the price was set at the market price. For eggs, similar things could occur. Soy lecithin is a common emulsifier, but could be replaced by egg lecithin if eggs were cheaper than soy.
abigail95 4y ago
the theory and evidence behind it shows the opposite, "sticky prices" are usually always sticky in one direction. wages is the biggest one, very hard to decrease wages but very easy to increase. consumer goods are the same, it's easy to discount your stock to sell it - but if you raise it you have to deal with "price gouging" and "profiteering" and "causing inflation".

ThreeBeanPizza 4y ago

The answer to the question of paying above market price is market power. When firms have market power beyond perfect competition they adjust prices above the theoretical competitive level where marginal cost = price. A change in supply generally, ie shrinking, gives firms more market power to charge higher prices => inflation. Intrest rates really don't touch market power so it is pretty fair to criticize interest rake hikes as a solution here. Intrest rate hikes also slow down business investment which makes supply less responsive. But it REALY depends on the market. If you are importing a lot of goods from compaies with a lot of market power right now, ex: oil, your domestic government and the fed of your country can't do much to fight inflation other then to tamp down economic activity overall with interest rate. What is really the issue is government policy to combat inflation has fallen by the wayside since feds are more responsive.

rcme 4y ago
> Intrest rate hikes also slow down business investment which makes supply less responsive. That's kind of a simplification. Interest rates affect business investment. But many kinds of business investments are just "business" for other companies. E.g. when TSMC invests in building a new chip fab, they buy EUV systems from ASML. ASML uses that money to pay their suppliers and employees, etc. Also, interest rates affect real estate prices, which affects real estate development, which is a big source of employment. Government debt is also more expensive, so high interest rates also apply downward pressure on government spending. I agree that there's too much market consolidation, and that isn't impacted much by interest rates.