NationStates Jolt Archive

There are a lot of people who argue against economic regulation in any form. Arguing that the forces of supply and demand regulate themselves to maximize the 'total surplus' for everybody.

But...in application, there are really no absolutes in economics. Here's an example. If demand goes down, the price goes down, right?

Consider this situation: There is a product, and you're the only person capable of producing it. Suppose, ten people want it. Five people are willing to pay $15 for it, and five people are willing to pay $10 for it.

How much do you charge for it? $10, of course.

Now suppose the people who were willing to pay $10 lose interest. Now only five people are willing to buy it, and they're willing to pay $15. How much do you charge for it now? $15, of course.

Demand goes down, price goes up.

And this happens in this situation, because the normal generalizations about economics only apply to a certain situation which happens to be the most common one. A situation where anybody can produce a product, and there is no major difference between the product any two firms can produce.

There are so many things that can happen that will change the rules:

-Any product that's unique or has very limited acess (Diamonds, specific pieces of art, etc) allows people to restrict the supply to raise the price.

-Any product that you need to survive and can not get in any other way allows people to charge whatever they think you are physically able to pay, and even price prohibitively.

-Any industry that requires large amounts of specialized knowledge, extremely large investments, or other similar hardship to enter allows corporate conspiracies such as price fixing, because you don't have to worry about smaller businesses entering the marketplace and underpricing you.

So...I'm all for economic freedom, as a principle. But, it is unwise and unrealistic to ignore the exceptions to what you might have learned in Econ 101. It's a simple fact: Having no restrictions on the economy would not maximize total surplus in those situations I described.

Consider this situation: There is a product, and you're the only person capable of producing it. Suppose, ten people want it. Five people are willing to pay $15 for it, and five people are willing to pay $10 for it.

How much do you charge for it? $10, of course.

Not if it cost $11 to make. Then I would go for the 5 people who would pay $15.
Other than that, I find it odd that there is nobody willing to pay a price between these two...

You could also sell it just to the five people willing to pay $15. Those offering only $10 - tough shit. Maybe they'll pay more next time. Doesn't matter if they go without if you're the only person capable of making the stuff, and your overheads are low.

Now suppose the people who were willing to pay $10 lose interest. Now only five people are willing to buy it, and they're willing to pay $15. How much do you charge for it now? $15, of course.

Demand goes down, price goes up.

This is operating under the asumption that five people completely change their minds about the product and five people maintain the exact sme view. This generally doesn't happen in real life.

I'm no free market fanatic, but this example doesn't work because it ignores supply.

If you want to sell ten products, then in the first circumstance you would indeed sell the products for $10. In the second circumstance, however, you would sell them for less than $15, because you want to sell ten and you have only five buyers. You have to make buying more attractive, and thus you lower the price.

If you want to sell five products, then in the first and second circumstances you would sell the product for the same price - $15.

This example doesn't work because it ignores profit. The producer will choose the level of production that maximizes their profit. If the good costs them $9 to make, they won't sell it for $10 to these six people, because then the profit would only be $6, whereas if they charged $15, they would make $18 from those 3 people. If the cost of production was lower than $5, however (assuming my math is correct), they would maximize profit by selling at $10.

Although it could have been stated better, something like his first example could happen, although it's a kind of an odd situation and not something I see the need to regulate against, unless it somehow became a major problem. These sorts of things generally exist way below the cost of regulation and generally sort themselves out over time.

*snip*

Among other things, you ignore the concept of supply. Demand doesn't exist by itself- it coexists with supply. I think your post needs some re-working.