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Supply and demand aren’t observable though. Only their intersections, price and quantity, are observable. Honest question: if we don’t know the shape of the cu

Supply and demand aren’t observable though. Only their intersections, price and quantity, are observable. Honest question: if we don’t know the shape of the curves, if we can’t observe them, and if they shift around according to unknown dynamics, what good are they?

RandomLensman 3y ago
Sometimes we can get quite close to getting the curves (could always be different tomorrow, some measurement and modelling issues etc.), but they are not always as inaccessible as you make them out to be. For example:https://www.nber.org/papers/w22627 https://www.nber.org/papers/w22627 ; (financial) markets with a CLOB also give a somewhat direct view on at least parts of the curve.
- soVeryTired 3y ago
  In some situations I agree you can get a rough and ready sense of one curve or other. Certain types of auctions, and order books for financial markets are examples (though I think your link is broken!). Even with order books though, they just provide point-in-time snapshots. It’s well-known that buyers will get a better fill than what’s shown in the book if they break their order up over time: that’s why it’s normally to trade VWAP. These are definitely the exception rather than the rule. I work for a financial services firm and I can confidently say we have no idea what would happen to demand if we cut our fees.
  - RandomLensman 3y ago
    I agree that things are often ephemeral to some extent. I'd say modelling trading impact and trying to optimise around it is actually quite intense modelling of supply and demand at times. But have you actually tried to establish elasticity and run experiments to that end? In all my time in industry, I have mostly not seen efforts to do that, but when people did that it actually was quite successful in increasing revenue. Fixed the link - thank you.
roenxi 3y ago
People have a bunch of instincts honed by millions of years in small tribes. Those instincts appear to be calibrated around resources being vaguely fixed and depend on the tribe's foraging luck. The supply-demand curve logic is an excellent argument to point out to people that, based on some basic and obvious axioms, their intuitions are dead wrong. They are justified with just that observation. Take, eg, a crisis. Price caps in a crisis are a terrible idea that are about to make the situation much worse. There was a shortage, now there will be a bigger shortage. That seems to be unintunitive to most people but anyone who has had some basic supply-demand curve training can be talked out of imposing caps.
- arethuza 3y ago
  I'm not disagreeing with the point you are making but I do find it would be helpful if people referenced actual examples of these things happening in real world scenarios rather than thinking that a simple model is sufficient?
  - roenxi 3y ago
    In my experience, which is not nothing, if you try that you'll end up in endless conversations where people go with some variant of "well it worked there, but it won't work here!". Economists have been idly trying to figure out a way to pitch the idea that wages are a price and therefore subject to supply and demand model for decades. No luck so far; it is difficult to get a man to understand something when that thing is his salary. Also, it is more interesting to try and find places where supply-demand doesn't work and then figure out why not. Usually the answer is regulation that creates shortages or overproduction. If you want a specific example; masks in COVID. There were price caps that guarantee we'll be caught short of masks the next time a respiratory crisis rolls around. It isn't like Bill Gates didn't see it coming, if there was money to be made he'd have a strategic mask reserve ready to go for the next one. But no. Price caps. There was even an article about a US mask producer who was refusing to expand production because he knew how it'd play out, unless my memory deceives me [0]. [0] EDIT Found the article - https://www.wired.com/story/surreal-frenzy-inside-us-biggest-mask-maker/ https://www.wired.com/story/surreal-frenzy-inside-us-biggest... . Bowen doesn't mention price caps, but you can see he is no stranger at all to how that sort of medical crisis plays out. He'd be the sort of person in a great place to make decisions about what sort of surge capacity to have on hand and how to plan for it and he is mainly responding to basic price signals. I still suspect that he'd be sensitive to the eminent domain risks under crisis conditions.
sumtechguy 3y ago
Supply curves are very observable. They are in fact about the only concrete thing you can get in economics. The demand curve on the other hand? That thing is borderline made up magic. But the reality is the inputs need to be known to make the curves. Supply curve is 'easy' as you know what it takes to build X number of items. So you can make that curve easily. The hard part is the other curve. How do you know I can sell X of an item. Is there demand there? 'utility' 'happiness' and other things like that make up that curve. But how do you measure those inputs? If you have been around awhile you probably have a good idea where your curve is by seeing it in action, but the inputs for it you are usually guessing. But starting out? Not really. What really bakes someone's noodle is the supply curve can affect the demand curve. You want to get as close to MR=MC as you can. But that is not always achievable. As you point out the curves move around. But that is on you as a business owner to make sure your prices are in line with your demand.
bawolff 3y ago
So you make estimates and extrapolate. Will estimates always be right? Of course not. But nobody has perfect knowledge about anything. That doesn't make analysis based on estimates useless.

RandomLensman 3y ago

Sometimes we can get quite close to getting the curves (could always be different tomorrow, some measurement and modelling issues etc.), but they are not always as inaccessible as you make them out to be. For example:https://www.nber.org/papers/w22627 https://www.nber.org/papers/w22627 ; (financial) markets with a CLOB also give a somewhat direct view on at least parts of the curve.

soVeryTired 3y ago
In some situations I agree you can get a rough and ready sense of one curve or other. Certain types of auctions, and order books for financial markets are examples (though I think your link is broken!). Even with order books though, they just provide point-in-time snapshots. It’s well-known that buyers will get a better fill than what’s shown in the book if they break their order up over time: that’s why it’s normally to trade VWAP. These are definitely the exception rather than the rule. I work for a financial services firm and I can confidently say we have no idea what would happen to demand if we cut our fees.
- RandomLensman 3y ago
  I agree that things are often ephemeral to some extent. I'd say modelling trading impact and trying to optimise around it is actually quite intense modelling of supply and demand at times. But have you actually tried to establish elasticity and run experiments to that end? In all my time in industry, I have mostly not seen efforts to do that, but when people did that it actually was quite successful in increasing revenue. Fixed the link - thank you.

roenxi 3y ago

People have a bunch of instincts honed by millions of years in small tribes. Those instincts appear to be calibrated around resources being vaguely fixed and depend on the tribe's foraging luck. The supply-demand curve logic is an excellent argument to point out to people that, based on some basic and obvious axioms, their intuitions are dead wrong. They are justified with just that observation. Take, eg, a crisis. Price caps in a crisis are a terrible idea that are about to make the situation much worse. There was a shortage, now there will be a bigger shortage. That seems to be unintunitive to most people but anyone who has had some basic supply-demand curve training can be talked out of imposing caps.

arethuza 3y ago
I'm not disagreeing with the point you are making but I do find it would be helpful if people referenced actual examples of these things happening in real world scenarios rather than thinking that a simple model is sufficient?
- roenxi 3y ago
  In my experience, which is not nothing, if you try that you'll end up in endless conversations where people go with some variant of "well it worked there, but it won't work here!". Economists have been idly trying to figure out a way to pitch the idea that wages are a price and therefore subject to supply and demand model for decades. No luck so far; it is difficult to get a man to understand something when that thing is his salary. Also, it is more interesting to try and find places where supply-demand doesn't work and then figure out why not. Usually the answer is regulation that creates shortages or overproduction. If you want a specific example; masks in COVID. There were price caps that guarantee we'll be caught short of masks the next time a respiratory crisis rolls around. It isn't like Bill Gates didn't see it coming, if there was money to be made he'd have a strategic mask reserve ready to go for the next one. But no. Price caps. There was even an article about a US mask producer who was refusing to expand production because he knew how it'd play out, unless my memory deceives me [0]. [0] EDIT Found the article - https://www.wired.com/story/surreal-frenzy-inside-us-biggest-mask-maker/ https://www.wired.com/story/surreal-frenzy-inside-us-biggest... . Bowen doesn't mention price caps, but you can see he is no stranger at all to how that sort of medical crisis plays out. He'd be the sort of person in a great place to make decisions about what sort of surge capacity to have on hand and how to plan for it and he is mainly responding to basic price signals. I still suspect that he'd be sensitive to the eminent domain risks under crisis conditions.

sumtechguy 3y ago

Supply curves are very observable. They are in fact about the only concrete thing you can get in economics. The demand curve on the other hand? That thing is borderline made up magic. But the reality is the inputs need to be known to make the curves. Supply curve is 'easy' as you know what it takes to build X number of items. So you can make that curve easily. The hard part is the other curve. How do you know I can sell X of an item. Is there demand there? 'utility' 'happiness' and other things like that make up that curve. But how do you measure those inputs? If you have been around awhile you probably have a good idea where your curve is by seeing it in action, but the inputs for it you are usually guessing. But starting out? Not really. What really bakes someone's noodle is the supply curve can affect the demand curve. You want to get as close to MR=MC as you can. But that is not always achievable. As you point out the curves move around. But that is on you as a business owner to make sure your prices are in line with your demand.

bawolff 3y ago

So you make estimates and extrapolate. Will estimates always be right? Of course not. But nobody has perfect knowledge about anything. That doesn't make analysis based on estimates useless.