I’ve confused myself a bit when it comes to the effects of an increase in the demand schedule for a consumption good.
In neoclassical economics it is said that this will lead to an increase in the price and quantity of the good in question.
Is it the same in austrian econ? I think it is. Here’s my reasoning:
The initial price increase is obvious. It’s the quantity increase and its effect on price I can’t seem to get my head around. Obviously, in the ERE, the percentage price difference between the MVP and DMVP of the factors of production can’t exceed the interest rate in society. But how does this “gap” created by the higher prices for the consumption good get filled? The immediate answer that comes to mind is that additional factors of production will be attracted to the industry and away from other industries, either as a result of new entrants or existing companies hiring them to reap the profits exceeding the interest rate. This will obviously increase the supply of the consumption good and lower its price, narrowing the “gap”.
My question is: how far will price fall as a result of the second step, or rather, what will be the “net” increase in price of the consumption good as result of an increase in the demand schedule of said good? To attract factors of production to the industry one needs to offer a higher price than is offered in other industries. Is it theoretically possible that the lowered demand in other industries will reduce their demand for factors of production so much that the industry to which demand is redirected will in the end pay the same price for these production factors as they did before the price increase, thus leading to an increase in the supply of the consumption good but not in its price?
It seems to me that factor specificity has something to do with this. Obviously if the goods produced by the industry that has experienced an increase in demand are produced using only purely specific factors*, no additional amount of these could be redirected to the industry no matter the price. Thus the only result is an increase in price without an increase in quantity supplied. On the other hand, how non-specific would said factors have to be to lead to the result first mentioned, that of an increase in quantity supplied without an increase in price? Would they have to be purely non-specific? This is an impossibility as explained by Rothbard. If this is true, then I guess factor specificity explains the “slope” of the supply curve and the extent to which price and/or quantity will rise as a result of an increase in demand for the consumption good.
Is this correct or have I missed something important?
*is this possible? Must not every production step include labor? If so, then the “vertical” as well as the “horizontal” supply curve have been eliminated as possibilities, leading to the conclusion that price and quantity must always increase as an increase in demand.