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Pastimes : Austrian Economics, a lens on everyday reality
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To: Don Lloyd who wrote (262)11/9/2003 8:51:08 PM
From: Wildstar  Read Replies (1) of 445
 
Don,

I think there are at least three separate issues at play here, so I will separate them into multiple posts for the sake of organization.

The first issue, which is probably a side issue, is the determination of the price of the consumer good itself. You have written before that according to Austrian theory, the price of a consumer good is dependent on:

1. Specific product demand from its potential purchasers.
2. Specific product supply from its suppliers.
3. Money demand to hold from the potential purchasers of the product.
4. Money supply held by the potential purchasers of the product.
5. The competing demand for all other products from its potential purchasers.
6. The competing supply of all other goods and services from their suppliers.

I am still trying to figure out how specifically the price vs. revenues curve is related to these six factors. For now, I will disregard #5 and #6 to concentrate on monopoly suppliers.

So why is Tylenol priced low in terms of #1-#4?--------------

1. and 3. For a given person, demand is low because it is not vital for his survival. He would often be willing to hold cash rather than exchange it for Tylenol until a low enough price is reached. Most of these potential consumers are in the low and middle class.

2. and 4. A given supplier wants to maximize revenue (assuming sunk costs, which result in constant profit margins over a wide range of prices). Because most of the potential consumers are in the low and middle class, he will decrease the price of Tylenol until a price elasticity of 1 is reached.

Why is KDP priced high in terms of #1-#4?--------------

1. and 3. For a given person who has use for KDP, demand is high because it is vital for survival. He would be willing to exchange cash for KDP even at very high prices.

2. and 4. A given supplier who wants to maximize revenues can charge high prices.

It seems like there should be more factors affecting 2. and 4. for both cases. As I have described it above, it doesn't seem like they are independent at all, but rather dependent entirely on 1. and 3.

I think the reason for this is that we are simplifying 2. and 4. by assuming all sunk costs. If this was not the case, a more intricate production structure would change how much a given supplier would be willing supply the good vs. holding cash. Assuming sunk costs takes the 'brain-work' out of the picture as the goal is simply to find the price at which elasticity of demand is 1.

Wildstar
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