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Pastimes : Austrian Economics, a lens on everyday reality -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (89)	12/18/2001 2:32:37 AM
From: Don Lloyd	Read Replies (1) \| Respond to of 445

twfowler - ...If the consumers would prefer other products they probbably would not buy the 82% increase in production of this product. You have to distinguish between consumers collectively and individual consumers. Individual consumers have to respond to lower prices because all of their owned goods and money must end up with roughly the same level of subjective marginal utility. If this is not the case, goods and money will be differentially exchanged until it is so. If a good becomes available at a lower price, and an additional unit of the good was only marginally short of being purchased before, then its subjective marginal utility must be forced down to roughly match that of its price. This is accomplished by acquiring more of the good and letting the law of diminishing marginal utility take over. Over all, some consumers are rewarded by the lower price at the expense of others whose more desired products must see increased prices and reduced production. ...Too much competition might not allow the profits needed for investment, but a monopoly will not IMO result in the most productive use of the factors of production. When management is in a comfortable position they won't stress themselves to cut costs. The risk of comfortable management is universal, certainly not restricted to monopolies, and can only be addressed by the profit motive, either directly or indirectly. It seems likely that the forcing of non-profitability by mandated actual competition may often make the problem worse. ...But they will only buy the greater amount of the product if they actually would rather have it (at whatever the current price is) then other products. If the other products are desired more they will be produced instead. Also if you have greater efficiency you might actually increase total production and consumption allowing people to buy more of whatever product these companies make, and more of other products. But the mandated competition reduces the ability to buy other products because the lower revenue will support fewer jobs and lower total wages and little or no investment income. Consider the two limit cases. First you have an economy in which there is no mandating of actual competition, although there is still plenty, and all products deliver strong profits, support high paying jobs and throw off investment income, ready to be re-cycled. Increases in efficiency are still rewarded. Essentially only the most efficient producer makes a given product. In the second case, competition is mandated for all products. The large profits of innovators do not exist. Most manufacturers are losing money, cutting jobs and expenses and are worrying about next week's payroll rather than planning for the future. There is little incentive to start a new business as success will not be adequately rewarded. If you study the life cycle of a new product, the largest part of profits is often found in the first few months or quarters of production before the competition has caught up. Usually the business plan was expecting large profits to last for years. If competition is mandated, then it will be clear up front that those dreams are impossible, and the venture will not proceed. Note that the price that maximizes revenue, without actual competition, falls over time all by itself. This is because the most eager buyers willing to pay the highest prices, will have been exploited first (in a good sense, they are making a voluntary exchange for a product that would otherwise not exist). Also, with general improvements in economic productivity, the price that must be charged to prevent actual competitors from entering gets lower and lower as time goes on. Also, a new product does not have the full level of productive capacity behind it from the start. It is the initial high prices and profits that enable increased productivity and capacity to be brought on line. Regards, Don