Econ 101 - Foundations Discussion

[Gelare]

Welcome, students! This is the discussion thread accompanying the lecture on foundations of economics, so feel free to ask questions and discuss here. I specifically would like feedback on whether I'm making the material too dry (hint: yes), since it turns out that people do tend to ramble about their specialties, for which I apologize.

I'll be expanding the lecture periodically, starting, probably, with diminishing marginal utility, consumer and producer surplus, and supply and demand, so be sure to check back. Let the discussion begin!

[Rook]

So, how do we start applying this to real world events. I might be skipping a lecture or two, but now that I've read over the basics you presented I want to know what structures they are the foundation of.

[Nesslandria Haneh]

Ah, sorry this took so long for me to read. I was expecting it to be really long, so I put it off.

If I can expand a bit in your place, Dean Gelare...

King Ari: You can actually apply even just those basics to the current gasoline issues America is facing. Which is more important to you, gasoline or corn? Milk or corn? Milk or gas? To deal with the current 'renewable energy' craze, we are trying to produce fuel from corn. By using more corn for fuel, we have less corn for food products. The obvious effect is that the price of corn, tortillas, etc., rise. Looking a bit further, what do farmers feed their livestock? There's usually a good amount of corn in that feed. Because the cost of corn rises, so does the cost of meat, eggs, milk, cheese, etc. So maybe you decide you'll replace corn with something else. That will drive the cost of corn down, but it increases the demand, therefore the price, of the alternative. The farmers are actually getting hit two-fold right now. Gas is more expensive, so it costs more to run their machinery, and it costs them more to feed their livestock. Some farmers may not be able to make it through the change. The market will adjust by farmers growing more corn. That leaves them less land to grow other things. That will in turn drive the costs of those alternatives up. What if it's discovered that barley makes a better fuel than corn? Then we have too much corn, and the cost plummets. Again, some farmers may not be able to make it financially.

Some nations decide that to prevent the fluctuations of the market, their government takes control, dictating what is produced and how much is produced. This can be problematic because governments don't really move fast enough to effectively and efficiently respond to changes in demand. Other nations have decided that the 'invisible hand', or demand, will guide the market. If the public needs or wants a certain product, the market will react and produce more of the desired products. By producing more, the price will lower, and more people have access to the product. If the public does not like a product, say toys from China, demand will fall and less will be produced, or in our case imported.

I'll stop there. Dean Gelare can explain this much better than I. I've only taken a portion of a semester of economics. Most of my explanation is based on a spirited conversation my class had in our first or second class.

[Rook]

Okay, so that's pretty much taking an elaborating on the basic examples of supply and demand. If they want it, it gets expensive, if they don't it gets cheaper. If there's alot of it, it's cheaper, if there's a short supply it gets expensive.

But how does an economist deal with intransitive preferences? Does it require asking more questions, forcing a decision or making assumptions?

[Gelare]

Excellent contribution, Viscountess Nesslandria, you've done very well to illustrate some of the interlocking systems in the economy. Farms are, in fact, a remarkably perplexing example, because the system of agricultural subsidies in the United States require farmers to grow only a certain amount of crops on their fields, and leave the rest of their fields empty - it really distorts supply and demand to a tremendous degree.

I also look forward to writing a lecture on the fundamentals of capitalism and communism, just as soon as I get the time. Despite the popular rancor toward communism, it is, in fact, nothing more than an economic system, and not a political one. There are good reasons not to like it, since it doesn't work super well in practice, but not good reasons to hate it - people may very justifiably have problems with the way the Soviet Union was run, but that's the fault of the totalitarian government, not the communist economic model.

As to your question, King Ari, economists pretty much deal with intransitive and incomplete preferences by forcing decisions, because the vast majority of the data economists use comes from peoples' actual spending habits. Outside of game theorists and behavioral economists, very few economists actually stick people in a lab and ask them which of two goods they like better; instead, they look at data like sales receipts, interest rates, and all that good stuff.

I have actually been holding off on writing the next lecture, because I want to provide a full explanation of supply and demand, and that requires graphs, which I don't really have anywhere to host, so I can't link to them in my lectures. I'll be looking into that.

[Rook]

You can use the same host I do to post the Uantir crest. I'll work out the kinks next time I see you on AIM.

[andreasthewise]

Very good introduction (as someone who's studied economics in high school and is doing it at university). Ari might be able to understand it a little better with supply/demand diagrams though.

[Gelare]

I couldn't agree more, Andreas. So let's do that then, don't you think? Lecture updated!

Also, interesting fact: whatever software automatically puts the context-sensitive ads on these boards has changed the ads in the economics lecture to be about ice cream. Cool, huh?

[Rook]

Economic flavoured ice cream. I think I saw that at Golden Spoon once.

Wait, let met get something straight.

Feb 16, 2008 0:54:12 GMT -5 Gelare said:

Now, if Becky can sell a pint of ice cream for a lot of money, she's going to make more of it. But if people will only buy from her at a cheap price, she'll produce less. So, price goes higher, quantity goes higher...

Why would the quantitiy go higher if, on the other graph, the amount purchased decreases on that side of the graph. You look at the final graph and you see that beyond the point of equilibrium they are making more than is bought and before the equilibrium they are making less than is purchased.

[andreasthewise]

Equalibrium is where it settles at. If one of the curves moves (say Anna decides she likes icecream and is willing to pay more) the Equalibrium Point moves. The only time you get more or less produced that the equalibrium point is when you start working in tariffs or ceilings or other government/foriegn interventions.

[Gelare]

You are quite right, King Ari, and that is why it's called an equilibrium point. That's where the amount the consumers will buy and the amount the producers will make are equal. At any other point, there will be either a surplus or a shortage. I'll be getting into that next update.

Also, economic flavored ice cream would be interesting. I'm imagining an ice cream store where every flavor is a different field of study. Geophysics could be like Rocky Road, etc. That would be so cool.

[Rook]

Well, I don't see why Becky would be inspired to make more of the expensive ones and less of the cheaper ones. Is it some kind of misguided optimism?

Jan 19, 2008 3:48:00 GMT -5 Gelare said:

Now, if Becky can sell a pint of ice cream for a lot of money, she's going to make more of it. But if people will only buy from her at a cheap price, she'll produce less.

That makes no sense to me. If I am selling something for cheap, than I'll want to more of them to compensate for the lack of profit off each individual sale. If they buy expensive I'd want to make more to meet demand, but isn't decreasing production of your ice cream if no one will pay your high prices for it taking two steps backward? Say you follow her graph, but take into account the consumption by Anna:

$1, 1p = $1
$2, 2p = $4
$3, 3p = $9
$4, 2p = $8
$5, 5p = $5

That's $27 if she sells all her ice cream.

If you cater to what Anna buys:

$1, 5p = $5
$2, 4p = $8
$3, 3p = $9
$4, 2p = $8
$5, 1p = $5

That's $35. So what inspires Becky to produce more of what's expensive except hopefulness?

The Queen says Mint would be Economic flavour, green like money.

[Gelare]

King Ari, your confusion on this matter stems from what exactly price means in this model. Usually in economics one assumes conditions of perfect competition. This is another very important thing that I'll do my best to go over soon. Basically, the important thing to note is, Becky does not choose the price. Neither does Anna. The market chooses the price. How?

Well, in situations of perfect competition, there are a whole lot of buyers and a whole lot of sellers, so that no one person can influence the price of something, whereas when one firm has a monopoly or a monopsony (that's what it's called when there's only one buyer - you learn something new every day!) that firm can actually choose the price.

It's also assumed that the goods each firm produces are homogeneous, that is, they're basically identical, no major differences in quality or branding. So, you don't have one person selling really awesome ice cream and one person selling really bad ice cream. Similarly, no one cares about the gargantuan branding effort behind Coke or Pepsi, since they are, in fact, the same thing. This is a simplification of how the real world actually works, of course, but it's usually not too bad an approximation. Plus, it makes calculations way easier.

Now, because Becky is producing the same stuff as everyone else, if she tries to sell her ice cream at a price higher than the prevailing market price, her customers will go to other shops and she won't sell any ice cream at all. So, she has to sell at the same price everyone else is selling at. She's only producing one good, ice cream, and Anna's only consuming one good, ice cream. There is no good, expensive ice cream, nor is there cheap, watered-down ice cream; it's all just ice cream.


So to sum up, hopefully, the answer to your question is that Becky doesn't produce more of what's expensive, because there's only one good to begin with. What inspires her to produce more of that one good is that the market price goes up, so it's worth her extra time and resources to produce more. If the market price goes down, she decides it's not worth it to produce as much, so she cuts back.

[Rook]

But doesn't cutting back if it gets cheaper loser her more money than if she tried to produce more to compensate?

[Gelare]

That would be true, except Becky can't produce the fourth unit of ice cream for the same amount of money it took her to make the second unit of ice cream. Producing more ice cream means hiring more workers, buying more ice cream machines, maybe renting another building to have the space to put all the stuff, and so forth.

I see where you're coming from, though, so let's think about this for a second. Let's say the price of ice cream goes down, so Becky makes more of it to compensate. She's clearly still making a profit on these extra units of ice cream, or else she wouldn't be making them. So the question now becomes, why wasn't Becky making the extra ice cream before the price fell? If she can make a profit selling the extra units at a cheaper price, she can sure make a profit selling the extra units at the original, higher price. If she wasn't doing that, she wasn't optimizing her business, and was actually operating at the wrong place on the supply curve, which probably means she'd get run out of business by all her cutthroat, cost-cutting competitors.

I hate to keep promising stuff in future lectures, but we'll soon see that in perfect competition, firms produce goods until the point where the marginal cost - that is, the cost of producing the next unit - equals the market price, or in other words, until the firm can't possibly make any more profit by producing more stuff.