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> Reduced demand reduces prices. It's the Law of Supply & Demand at work. You have to be careful when asserting this though, because demand does not mean what

> Reduced demand reduces prices. It's the Law of Supply & Demand at work. You have to be careful when asserting this though, because demand does not mean what most people think it means. In particular, it does not refer to the number of people demanding a good, nor does it refer to a volume of goods purchased. A declining sales volume occurring together with rising prices does not violate the law of supply and demand.

WalterBright 3y ago
Rising prices reduce demand. But there are competitors. That's why a company cannot just raise prices.
- mitthrowaway2 3y ago
  Yes, rising prices reduce demand. But rising volumes also create economies of scale and allow low prices. There's a delicate balance and sometimes an equilibrium of large volume, low price can transition to a new equilibrium of low volume, high price, or vise-versa. For example, if you are a software company and you sell software to a small group of professionals, like a CAD program, your price is probably around $1000 ~ $5000 per seat, per year. And competition will not lower it, because your competitors face the same economic situation you do: it's a niche product, you have to amortize a high development cost over a small number of customers, and those customers have money and are willing to pay. However, there is also a stable equilibrium for a company to turn a similar profit shipping software of equal quality to a very large number of people for a very low price. Something like a spreadsheet or word-processing software. Now your software is cheap, or supported by ad revenue, and yet you can still remain highly profitable. If, however, your userbase started to shrink for whatever reason, you might have to charge the remaining users a large amount. Most will leave, but a few of those users may derive a lot of value from your software and are willing to pay, and you end up with the same economics as the CAD developer. Software is of course an extreme example, where the marginal cost of production is approximately zero, but most industries outside of resource extraction have declining marginal costs with scale. That's why you can end up with high-quality cheap components (like cameras, etc) that are used in smartphones, where they have high-volume production, and very expensive specialty cameras for eg. microscopes, even though the specialty camera required much less investment of R&D to produce. It can only be sold at a high price because there is not enough demand to reach economies of scale that would allow a lower price. So if for whatever reason, money was sucked out of the economy and the average person suddenly became very poor and could not afford a smartphone, it's possible that smartphone companies would compete hard to keep those customers and drop their prices. But if that doesn't make for a sustainable business, the smartphone makers have to drop production to sell only to a few wealthy buyers, the remaining phones will get much more expensive, because their components will be made in expensive fabs at smaller volumes. The total revenue will be lower, the GDP would be lower, but the average price of goods can still be higher. Especially when there's a large wealth disparity to make that high-price low-volume equilibrium stable.
  - WalterBright 3y ago
    Inflation isn't a price increase in one item. It's a price increase across the economy, including wages. Your theory of inflation does not explain why it isn't continuous, and tends to follow periods of enormous deficit spending. That's a common factor to inflationary episodes, not some industry figuring out how to gouge.
    - mitthrowaway2 3y ago
      I'm not sure what theory of inflation you think I've presented, because I haven't presented a complete one -- I've only offered an explanation of how already-high inflation enables corporations to become less price-competitive, which makes inflation more volatile, and you will find the same explanation in mainstream economics and central bank publications. (I did explain why it isn't continuous). It doesn't make any attempt to explain what instigates the inflation to begin with, which could certainly be caused by a spike in deficit spending, or a natural disaster that reduces supply, or a trade embargo, or a war, etc. Inflation isn't a price increase in one item, but the scenario I presented above does not create a tradeoff between one item and another; it can apply to any and all category of manufactured goods or services where efficiencies of scale apply. Macroeconomists usually assume only a single fungible good anyway (a "widget").

WalterBright 3y ago

Rising prices reduce demand. But there are competitors. That's why a company cannot just raise prices.

mitthrowaway2 3y ago
Yes, rising prices reduce demand. But rising volumes also create economies of scale and allow low prices. There's a delicate balance and sometimes an equilibrium of large volume, low price can transition to a new equilibrium of low volume, high price, or vise-versa. For example, if you are a software company and you sell software to a small group of professionals, like a CAD program, your price is probably around $1000 ~ $5000 per seat, per year. And competition will not lower it, because your competitors face the same economic situation you do: it's a niche product, you have to amortize a high development cost over a small number of customers, and those customers have money and are willing to pay. However, there is also a stable equilibrium for a company to turn a similar profit shipping software of equal quality to a very large number of people for a very low price. Something like a spreadsheet or word-processing software. Now your software is cheap, or supported by ad revenue, and yet you can still remain highly profitable. If, however, your userbase started to shrink for whatever reason, you might have to charge the remaining users a large amount. Most will leave, but a few of those users may derive a lot of value from your software and are willing to pay, and you end up with the same economics as the CAD developer. Software is of course an extreme example, where the marginal cost of production is approximately zero, but most industries outside of resource extraction have declining marginal costs with scale. That's why you can end up with high-quality cheap components (like cameras, etc) that are used in smartphones, where they have high-volume production, and very expensive specialty cameras for eg. microscopes, even though the specialty camera required much less investment of R&D to produce. It can only be sold at a high price because there is not enough demand to reach economies of scale that would allow a lower price. So if for whatever reason, money was sucked out of the economy and the average person suddenly became very poor and could not afford a smartphone, it's possible that smartphone companies would compete hard to keep those customers and drop their prices. But if that doesn't make for a sustainable business, the smartphone makers have to drop production to sell only to a few wealthy buyers, the remaining phones will get much more expensive, because their components will be made in expensive fabs at smaller volumes. The total revenue will be lower, the GDP would be lower, but the average price of goods can still be higher. Especially when there's a large wealth disparity to make that high-price low-volume equilibrium stable.
- WalterBright 3y ago
  Inflation isn't a price increase in one item. It's a price increase across the economy, including wages. Your theory of inflation does not explain why it isn't continuous, and tends to follow periods of enormous deficit spending. That's a common factor to inflationary episodes, not some industry figuring out how to gouge.
  - mitthrowaway2 3y ago
    I'm not sure what theory of inflation you think I've presented, because I haven't presented a complete one -- I've only offered an explanation of how already-high inflation enables corporations to become less price-competitive, which makes inflation more volatile, and you will find the same explanation in mainstream economics and central bank publications. (I did explain why it isn't continuous). It doesn't make any attempt to explain what instigates the inflation to begin with, which could certainly be caused by a spike in deficit spending, or a natural disaster that reduces supply, or a trade embargo, or a war, etc. Inflation isn't a price increase in one item, but the scenario I presented above does not create a tradeoff between one item and another; it can apply to any and all category of manufactured goods or services where efficiencies of scale apply. Macroeconomists usually assume only a single fungible good anyway (a "widget").