Praxeology and an example of an upward sloping demand curve

Economics Economics Questions
1

Hi all,

I have started reading human action and I have come across what I believe to be an example which contradicts the apodictic certainty of downward sloping demand curves and I would appreciate some feedback as to whether my reasoning is correct or faulty.

First of all, through Praxeology we understand that acting humans allocate resources in their possession to the use which allieviates the greatest degree of unease. This use-order gives rise to decreasing marginal productivity in successive homogeneous goods. So far so good.

But what happens if the homogeneous good in question actually has an increasing marginal effect on the diminuition of easiness. Doesn’t the subjective value (belief in the actual removal of uneasiness) also increase in this case? And since the subjective value increases, so should the demand curve.

Let me give a specific example of what I am talking about. Say for instance, that I wanted to build a bomb and understood that Uranium 235 could be used for this purpose. With less than 50kg of Uranium 235 I cannot use it as a bomb, but only for other uses I value less urgently. So from 0-49kg I have a downward sloping demand curve. But at the 50th kg, my demand curve spikes upwards. I can now build a bomb, and I would be willing to part with more resources to acquire this extra 1kg than I would for the 49th kg that preceeded it. My demand curve is now upward sloping at 50kg.

Of course, the reader will notice that the use(s) of the Uranium has changed between the time I owned 49kg and the time I owned 50kg. But regardless of this change of use, the fact that for the homogeneous good in question I now value successive goods greater than previous goods violates the Praxeological deduction of a downward sloping demand curve…or at least it violates my current understanding of it.

Please help me resolve this incongruency. All the best,

Gerard

2

I am not sure it actually is the same good though. If item X has completley different possible applications then item X+X I would say these are two seperate goods and not just more of the same thing.

This example should be a good one to illustrate what a terrible idea it is to for instence create aggregates for economic use based on definitions that have nothing to do with economics. Like the shape and size of an object rather then it’s applications and usage…

3

A downward-sloping demand curve need not be a straight line. Indeed, it is usually a ladder, with certain points having “jumps” between them. Would this solve your problem?

Alternatively, I would treat 50kg of Uranium and 49kg of Uranium as heterogenous goods. That is to say that as far as you are concerned, 49kg will not satisfy your end, whereas 50kg will. Although they are different quantities of the same “physical” good, they are teleologically different. (I hope I used that word correctly).

4

Downward sloping, heres why:

The hypothetical buyer is not more willing to pay more for the 50th kg than for the 49th kg, because if it lacked the 48th kg, then it would have needed 2 kg. If it lacked the 47th kg, you would have lacked 3 kg… If it lacked the 2nd kg, then it would need 49 kg.

In order to get from 47 kg to 48 kg, you need to acquire the 48th kg first, so it is more valuable than the (48+n)th kg. And so on.

The alternative uses of 0 to 50 kg are the same, since each additional kg brings you closer, but by a proportionally less important amount, to the hypothetical government’s goal of 50 kg.

5

Ok, so, as I mentioned in my post I get the idea that the ‘use’ of Uranium 235 is different between the 49th and the 50th kilo, but the ‘physicality’ of course remains the same. In this case it is obvious that marginal utility is not something related to the goods in and of themselves, but of the particular services they render. The physicality of the good may have nothing to do with it’s actual use value.

But here remains my dilemma.

If the physciality of a good may have nothing to do with its use value, then how can we come up with a theory for prices to fall with increasing increments of that same physical good in the market? What I mean here is, how can I make a Praxeological deduction that prices will decline for an actual good when its physical quantity increases when this may have no actual relation to the marginal utility that it yields?

Do you get it? The physical good is what prices are attached to, not my ‘subjective use value’. So how can we be certain that ceteris paribus increased quantity in the market of a particular physical good will lead to a decrease in price?

6

Well if you aren’t certain you will actually be able to build a bomb when you set of the 49th kilo could be worth more then the 1st.

But then your value preferences changed somewhere along the line and you re-valuated the goal of building a bomb to a higher priority when it became a real possibility to do so. If the value a bomb holds the same position in your value ladder when you set of to aquire the 1st kg as the 49th you should be willing to trade the same value of other commodities for each of them. But in total you will be willing to pay more for the first kg then the last cause you are also willing to save it at zero interest while aquiring the rest of the uranium.

7

What I mean here is, how can I make a Praxeological deduction that prices will decline for an actual good when its physical quantity increases…

You can’t draw that conclusion from the law of marginal utility and your example is not the only problem this conclusion would have.

Another problem is that an increasing abundance of a specific type of item should increase the drive to make it more valuable. Because it is cheap entreprenours will want to use it for everything it can possibly be used for rather then alternatives and often come up with new technology to do just that, increasing the price of the item.

Decreasing marginal utility compares prices of similar items it does not say anything about the absolute utility of an item. The entire curve can shift due to a number of reasons … but it is still sloping downward.

It is probably also what is going on in your example, if you actually pay more for the last kilo of uranium you have probaly become more inclined towards building a bomb because you are so close and you shifted the entire curve cause your value preferences changed. But if you re-adjust all the previous kilos bought accord to the new value preference you would have paid more for them.

8

This specific “problem” is addressed quite clearly in Man, Economy and State by Murray Rothbard (in the very first chapter, I believe).

Read it or download it here:

http://mises.org/resources/1082/Man-Economy-and-State-with-Power-and-Market

9

Yes thanks for that link hypervigilant.

It is clear to me now that my earlier fears are totally correct. The goods which consist of a given ‘Supply’ - (i.e. the good which provides a particular kind of benefit) is different in the 0-49kg case from the 50kg case. Also with respect to each of these two ‘Supplies’ demand curves do slope downward for each.

But the key insight is that a ‘Supply’ does not have a one-for-one equivalence with the homogeneous physical goods that it consists of. Rather, homogeneous physical goods can themselves be different ‘Supplies’.

An interesting implication of this fact is that there is no a priori reason to expect marginal utility to decline with increases in the quantity of some homogeneous physical good. So while increases in ‘Supply’ will necessarily reduce marginal utility, increases in the amount of the physical entity of which the ‘Supply’ consists does not necessarily decrease marginal utility.

This is actually a non-trivial distinction in the theory of Praxeology, as it means there is does not exist a universal expectation that increases in the physical quantity of an arbitrary good will automatically lead to lower marginal utility and its consequence, lower prices. Rather we must apply our human understanding of the ‘Supply’ to which the Physical good will be allocated in order to decide whether or not this conclusion holds.

Fascinating!

10

I tried skimming through the first chapter of Man, Economy and State to find the argument I was thinking of, but couldn’t find it…it’s possible it’s in a later chapter or I just missed it.

And I’m not quite sure what your understanding is after reading your response, either. So I’ll add to what others have said.

One way to look at it is that you have 49 individual kg’s of the good and are considering buying another.

Your hypothetical value scale (ordered most valued to least valued; items in parenthesis are things you don’t have):

  • (WMD)
  • first kg
  • second kg
  • third kg
  • …
  • 49th kg

Now obviously, if you were to value the 50th kg more than any of the other kg’s, you’d be willing to give up one of your 49 kg’s to acquire the 50th kg, but assuming you measure it’s value in the same way as the others, this would defeat the purpose of acquiring it in the first place as you’d still only have 49 kg.

So if you’re ever going to get your 50th kg, your value scale is going to look something like this:

  • (WMD)
  • 1st kg
  • 2nd kg
  • …
  • 49th kg
  • (50th kg)
  • other stuff…(some money, etc…the things you’re willing to trade away to get 1 kg)

You can also view your 49 kg’s that you already own as one good.

Value scale:

  • (WMD)
  • 49 kg

But again, if you’re ever going to acquire a 50th kg, it’s going to be valued less than the 49 kg good. Claiming that it’s valued more than the 49 kg good is saying that you’re willing to trade the 49 kg good for a 1 kg good…then you’d need 49 more kg’s to make your WMD rather than just one kg.

So once again, if you’re ever going to get your 50th kg so you can create your WMD, your value scale will need to be something like this:

  • (WMD)
  • 49 kg
  • (first 1 kg)
  • other stuff…(some money, etc…the things you’re willing to trade away to get 1 kg)

Then once you find an opportunity to make a trade to get your 50th kg (or first 1 kg), under the assumption that you consider them homogenous goods, you can consider them all as just one 50 kg good that was necessary for creating the WMD. It is entirely possible throughout my examples that there are other goods on your value scale which you own that are valued more highly than the WMD and/or any of the kg’s, but may by the time you are looking for the 50th kg be valued less than the 50th kg. But if you are going to acquire a total of 50 kg’s, you must value additional kg’s less than the kg’s you already own. Here’s an example of this:

  • first unit of money
  • (WMD)
  • second unit of money
  • 1st kg
  • 2nd kg
  • …
  • 49th kg
  • (50th kg)

and now your value scale changes to this:

  • (WMD)
  • 1st kg
  • 2nd kg
  • …
  • 49th kg
  • (50th kg)
  • first unit of money
  • second unit of money

So where before you valued the first and second units of money more than the WMD and kg’s respectively, now you value them less than the WMD and any of the kg’s you own, as well as less than the 50th kg you want to purchase. But the 50th kg must be valued less than the 49th, which is valued less than the 48th, etc.

Hopefully I understood your problem correctly and that this is helpful. If you haven’t read Man, Economy and State with Power and Market by Murray Rothbard yet, you might want to read that before reading Human Action, as many people in other threads have suggested. It’s supposed to be a little easier to understand than Human Action and will as a result make Human Action itself easier to understand. I finally started seriously reading it 1.5 or 2 weeks ago and am half way through the 6th chapter so far, and it’s an awesome read.

11

Hi Hypervigilant, Hmmm, to be honest I don’t think your analysis above is right.

The discussion of the definition of ‘Supply’ that I use is on page 23 of the link to MES that you posted. I think it is perfectly clear that in my U235 example the 1st-49th kilo is a different ‘Supply’ than the 50th kilo because it can now serve a new and different purpose than the kilos before it. It just so happens that the 50th kilo is the same physical ‘good’ as the 1st-49th kilos and it just so happens that it will annihilate the 1st-49th kg ‘Supplies’ in its use.

In response to your reply, this sentence;

“But again, if you’re ever going to acquire a 50th kg, it’s going to be valued less than the 49 kg good.”

is wrong by my earlier assumption that I value the extra utility of 50th kg (which now makes it possible to use all 50kgs as a WMD) more than than my 49th kg.

The following sentence

“Claiming that it’s valued more than the 49 kg good is saying that you’re willing to trade the 49 kg good for a 1 kg good…then you’d need 49 more kg’s to make your WMD rather than just one kg.”

and this sentence;

“you can consider them all as just one 50 kg good that was necessary for creating the WMD.”

is my whole point that ‘50kgs’ is a different ‘Supply’ than 50x1kg.

So again there are two supplies, supplies of 50kgs and supplies of 1kgs, it just so happens that adding an additional 1kg when I already have 49kgs adds more marginal utility than my previous unit, because now I have a different good.

So downward sloping demand curves still hold for ‘supplies’ but not for ‘goods’, because even homogeneous ‘goods’ can be complementary and produce greater value through their combination than they can individually.

12

I’m not sure what the axes of the graph are in this case of demand curves. Care to elaborate on that for me?

Each kg of uranium has a use that you assign to it. The 50th kg will be worth less to you than the 49th kg. The 50kg altogether for one use is worth more than 50kg where each kg has a different use. We can say that the 50kg is worth more than the 49kg. We don’t use the 50th kg to make a WMD if the other 49kg aren’t used. That is sensical. I don’t see how this violates praxeology or value scales. But if I do, I’ll be sure to edit this. :wink:

13

I found the relevant pages that I remember reading in MES:

Pages 73-74, starting with the last paragraph of 73.

And Appendix A of Chapter 4, starting on page 311.

These should clear things up (at least for myself, as I’m pretty sure it says I was mistaken, lol).

14

Yes, on page 73 of MES Rothbard clearly echoes exactly what I have been saying. Eggs 1-3 satisfy different wants than 4 Eggs which can make a cake, therefore they are different ‘Supplies’ even though they are the same physical good. In this case the ‘demand’ curve with price on the vertical axis and the quantity of a specific ‘Supply’ on the horizontal axis IS always downward sloping. But a graph with price on the vertical axis and ‘Physical Quantity’ on the horizontal axis may not be everywhere downward sloping, as it may consist of different ‘supplies’ as physical quantity increases allow for different ‘Supplies’ to satisfy new wants.

15

The simple answer is that the law diminishing marginal utility only apply to eqivalent goods.
One cinema ticket and 2 cinima tickets for you and your girlfriend is not eqivalent goods.

About the ordering of value for kilos 1 through 50 for the purpose of building a bomb I am not quite satisfied with hyp3rvigi1ant’s explination though.

You are correct that the next kilo can’t have a higher value then the one before because then I would trade another kilo of uranium for it.
However it doesn’t follow from this that the next kilo is worth more. They can also have equal value.

So I am not convinced that diminishing marginal utility can be applied to the equal components of a hole. It seems to make more sense that they are equal in value. I wouldn’t trade the 48th kg for the 49th cause it is pointless only giving me transaction costs for zero gain. I would however trade exactly the same value of other goods for the 48th kg as the 49th (unless I am getting more and more inclined to build the bomb the more feasable it seems).

It seems the value scale would break down more like:

  • MWD
  • 50kg of uranium
  • other stuff

and no further distinction is possible.

The only thing I could think of is that the time payment is higher for an earlier kilo. But I am not sure that counts as diminishing marginal utility.