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

To: Don Lloyd who wrote (262)	11/9/2003 8:51:08 PM
From: Wildstar	Read Replies (1) \| Respond to 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

To: Don Lloyd who wrote (262)	11/9/2003 11:35:14 PM
From: Wildstar	Read Replies (1) \| Respond to of 445

Don, The second aspect I want to discuss is how different factors affect a given price vs. revenues curve. Each point on a curve represents a price, an amount sold, and revenue generated. ---------------------------------------------- 1. How does an increase in demand for Tylenol, regardless of the potential use by the purchaser of that Tylenol, affect the curve? My tentative answer follows. If now there are simply more people willing to exchange their cash for Tylenol at the same price, then the curve peaks at the same price, but the peak is higher. If the added consumers are willing to exchange their cash for Tylenol at a higher price, they will compete with the existing purchasers for Tylenol and the peak will shift to the right to a higher price. I think the peak will be higher. If the added consumers are willing to exchange their cash for Tylenol at a lower price, then the curve will shift to the left. Again, I think the peak will be higher. ------------------------------------------- 2. How does an increase in supply from a monopolist supplier affect a given price vs. revenues curve? If the supplier is able to create extra supply at virtually zero marginal cost, I don't think it really matters. He will still sell at the same price which results in a price elasticity of demand of unity. No change in the curve whatsoever. If the supplier is able to create extra supply only at a non-zero marginal cost, I'm not sure what will happen, but it seems as if the supplier was not willing to sell more at zero marginal cost, he will definitely not sell more at non-zero marginal cost. -------------------------------------------- 3. How does an increase in supply due to the entrance of a second supplier, B, affect a give price vs. revenues curve existing supplier A? A will seek to decrease the price of the product to shut out B from viable existence. If A is successful, the selling point will be to the left of the peak, resulting in lower prices but same supply as before, assuming sunk costs (after all, the product has already been manufactured). Consumers benefit, but company A suffers a shrinking of profit margins. If A is unsuccessful in driving B from the market, both A and B will sell at a similar lower price. However, this price will likely be higher (?) than if A had been successful. The lower price will be coupled with a combined higher supply for consumers. How much lower will the price be and how much higher will the supply be compared to the case of a monopolist supplier with no potential or actual competition? Not sure. I think you have stated before that the price will be slightly lower and combined supplier will be much higher. Consumers will again benefit due to lower prices and increased supply. However, the companies will both suffer from shrinking profit margins. Further, as you have stated before, there will be a duplication of costs so that the economy as a whole will suffer due to duplication of effort and lower wages. Wildstar The similar price results from the general trend of productivity increases to spread across given industries.

To: Don Lloyd who wrote (262)	11/10/2003 6:58:28 PM
From: Wildstar	Read Replies (2) \| Respond to of 445

Don, Assume that a unique consumer widget is made from two metals, copper and unobtainium. The market price of the widget is approximately set to maximize revenues. This is a direct result of the structure of the subjective demand of consumers. Copper is a non-specific factor of production for widget manufacturing and has a market price (part of widget manufacturing cost) which is likely to be effectively independent of the widget market and is the result of the interaction of supply and demand of and for copper. The cost of copper is for widget manufacturing NOT typically the result of any subjective value considerations for widgets. Unobtainium is a specific factor of production for widget manufacturing and its price is only determined by bargaining between the supplier(s) of unobtainium and the manufacturer of widgets. As such, it should have a strong dependence on the market price of widgets and be only one step away from the subjective value of widgets to consumers. I believe the degree of dependency of the price of the factor of production on the price of the consumer good is proportional to its degree of specificity. Yes, the price of copper should be independent of the subjectively determined value of widgets. But, if copper was used to make only widgets, gizmos, and doodads, in equal proportions, then the price of copper would be dependent on the subjectively determined value of widgets to a degree (1/3?). For a completely specific factor of production, it's price must be completely dependent on the subjectively determined value of the consumer good it produces. About your example - I want to understand the exact mechanism by which the price of a specific factor of production is determined by the subjective valuations of the consumer good it produces. ...to be continued.