It looks like Think Blues example adds in the component of reducing the value (cost) of C due it an increase in supply. 5C are worth 3A or 3B (5:3 ratio) now that the supply is higher versus the 1:1 ratio when the supplies were equal.
It was meant as a joke… apparently, it wasn’t funny, so: I’m sorry Caley… no offense meant.
Clayton -
Thanks Micah and Think Blue.
I’ve been staring at your posts for three days and still can’t figure it out. I think this is similar to the difference between absolute and comparative advantage, which is what econ books start with. I never understood that either. But I still can’t figure it out.
Also, there’s difference between your two tables. In Micah’s consumption stays the same as production, but in Think Blue’s they are different for each worker. Think Blue’s numbers are confusing because their Expenditures are differnet from their Income. How can how much he gives away be different from what he gets.
Is that because unlike Micah, Think Blue’s table says that in nominal terms expenditure-income are different do to changes in prices, but in real terms they are of course the same. He’s starting to inclue prices and money.
Still very confused, but working on it!
Thanks for your help!
Joe
Think Blue’s example takes into account marginal utility whereas mine does not. Mine was meant to be about as simplified as you can get, assuming all goods are of equal value and marginal utility does not exist (you derive the same utility from the first widget as the 1000th widget).
Is there a particular part of our examples you don’t understand that we can perhaps shed some light on?
Hi joemac,
I probably made it more complex than it has to be. To provide better clarity, perhaps we can start with Micah’s example first, and walk through the steps of the problem, from start to finish?
Let us know what you’d like to do.
thinking about Micah’s post…
In it, one day C becomes more productive and goes into the market with 10 shoes (having saved 2 for himself). Your table assumed that these extra goods will be desired. It assumes that A & B will lower their previous consumption of their own goods and buy all of C’s new stuff. But what if they tell him that they don’t want his new stuff?
Then his new increase in productivity will have been for nothing. Your table allows for only two possibilities of an increase in productivity, 1) C will consume all of his own new shoes, or 2) All three will change their desired distribution of consumption.
For 1) no one needs that many shoes and also the entire reason to produce is to exchange it for other stuff, but this leads to 2) there is no reason that A or B will necessarily want the newly produced shoes
Or, take an extreme, let’s say C’s productivity skyrockets and he makes 100 shoes. Then (2) would be impossible because A & B only have 6 worth of purchasing power each, and (1) is impossible for what I explained in the last paragraph
Ergo, the original problem I had with all of this…!
Thanks, Joe
This is where Think Blue’s example comes into play. He takes into consideration marginal utility whereas I do not. My example takes place in a world without marginal utility so it doesn’t’ properly extend to the real world, though it simplifies things a lot. It sounds like you grasp the concept in a world without marginal utility so you should focus on Think Blue’s example instead.
In Think Blue’s example A is not willing to trade 1A for 1C after he already has 2C. However, he is willing to trade 1A for 3C after the first two C. That is, he already has two pairs of shoes, enough for his needs and he would rather have a 2nd A than a 3rd shoe. If the shoemaker (C) were to offer him 3 shoes (3C) in exchange for another A, he would be willing to give up one A for 3 shoes (3C).
If production suddenly jumped 1000 fold it may required 500 shoes for him to be willing to trade for 1A because after the first few shoes, he just doesn’t really need any more. This is what marginal utility is all about. After you have 1 of something, you want another less than you wanted the first. For some goods this falls off very quickly (cars) while for others it can be a slow decline (food).
Like what Micah said, this has something to do with the law of diminishing marginal utility. From my example, think about it this way.
Let’s say Producer A makes televisions, so for a period of time he makes 6 TV’s (represented as 6A in the above table). He doesn’t need all 6 TV’s, so he’ll keep 2 TV units for his personal use, and trade away the 4 remaining TV units.
From his perspective, the 6th TV is less valuable than the 5th TV, and the 5th TV is less valuable than the 4th TV, and so on. Each and every TV he gives away from his stock of units, the nth - 1 unit becomes more valuable than the nth unit, until he has one TV unit left, which he’d be the most reluctant to give away.
For the 6th and 5th unit of A (that is TV units), he trades for 2 units of B, so the trade is 2A for 2B.
This is leaves 4A remaining in stock.
Here is where the price of C comes in. If the price is 1A for 1C, then Producer A would give Producer C the 4th and 3rd units of A.
However, if the price is 3A for 5C (that is 1A for 1.66C), then Producer A would give Producer C the 2nd unit of A, as well as the 3rd and 4th unit.
This means he’s willing to give up the 2nd unit of A for an extra 3 units of C, whereas before he’d give up the 3rd and 4th unit of A for 1 unit of C each.
For each remaining unit left, Producer A raises the price he is willing to sell Producer C for the nth -1 in his stock.
Then Producer A would be unwilling to sell the 1st unit of A (the very last unit of A) at any price, even if Producer C offers him 100 C for that one unit.
For Producer A, watching television is priceless!!
Income and expenditure model is confusing within barter. Instead, let’s replace the word “Income” with “Bought”, and replace the word “Expenditure” with “Sold”.
Here is the logic:
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Increased output by Producer C means increased sales (more things sold). More C units are sold.
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Increased sales means increases in what Producer C purchases (more things bought). More A and B units are bought.
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Increased purchases by Producer C of A and B units means increased sales for Producer A and B. More A and B units are sold.
Conclusion: Increased output, increases the sales for Producer C, which increases the sales for everyone else (Producer A and B).
I think I got it.
Before, I was thinking that the value of a good is metaphysically and objectively set in stone. As if Moses came down and told use how much a shoe is worth. But it is purely subjective.
To an individual its value as consumption is determined by its marginal utlility to him, thus the demand curve. Now, to the producer an increase in productivity and technology does not mean that suddenlly he produces a million shoes, but merely that his marginal cost of production has fallen. It is now cheaper to produce one more for himself. This means he is now willing to sell a show for less of someone else’s “real goods” as long as benfits outway costs. His real income will now go up because he can sell more shoes even though each one individually will fetch less real goods in return.
Consumer’s real income ALSO goes up because each of their goods, can now fetch more goods from a trade, namely, a shoe.
So, let’s say we have island with Crusoe and A - G. Each specilalize, but nobody’s productivity ever goes up. But Crusoe, the shoemaker his productivity does go up. This means that his real income will go up by say 10%, but each other A - G will only go up by maybe 1%.
This is like Henry Ford, he grew super super rich, but everybody also grew a little more rich because their incomes could buy “more” real goods, a car.
One more confusion. In a barter economy an exchange is spending and buying at teh same time. When Crusoe and the others exchange the exchange IS their real incomes going up. But let’s say we have monetary economy in full equilibrium. He sells them his new cheap shoes, his real income goes up by 10%. Then he needs to spend it so he goes to them and spends that money. Their realy incomes now went up, and they spend it on his stuff. And so its just an endless spiral of spending and incomes going up. But thats ridiculous. What makes perfect sense now in the abrter economy is still difficult to visualize int eh money economy.
Thanks.
You just have to look at money as a highly marketable good that is traded in the same way any other good is in a barter system. In your example, pretend that there is a person H producing good H. When A buys goods from C he gives him some H. C then gives H to B when he wants to buy from B and B gives H to A when he wants to buy from A. It’s exactly the same as a barter economy except sometimes people use what they previously purchased to make further purchases.
Let’s say, for example, you make a bunch of shoes. I may buy some shoes from you and then later realize I don’t want that many shoes. I could then trade your shoes for someone else’s good at the same rate I bought them from you. In the end the shoe distribution is basically the same, but the shoes may have changed hands a few times before settling in their final resting places where they are consumed (saved). If we then assume your shoes are indistructable, I may later use shoes that I was consuming (saving) and trade them away in exchange for something else. In this example we have been using shoes as a form of currency.
This explanation is rather poor so if you still have trouble understanding it let me know and I will take another shot at it.
Well, since this was already bumped, I might as well add these…coincidentally found and read them just today when doing research for another purpose:
Say’s Law in Context
Lord Keynes and Say’s Law
If we’re linking to stuff, here’s an article on Say’s Law by Steven Kates: http://mises.org/journals/qjae/pdf/qjae13_4_1.pdf
He has also written (as Tommy Wiseau would say) “a book aboudit”.
Incidentally, Kates is a far as I know the only Austrian-leaning academic economist in my country (I really hope there are others).
I’ve been thinking about this for the last few days and I’m back at square one. Even in a simply three man barter economy I don’t understanding why an increase in productivity increase everyone’s wealth.
So, I am creating a little model of an economy with…
- Butcher, Baker, and Tailor.
- There are a total of three trades.
- Relative real prices of 1 clothes = 4 bread = 8 meat
I attempted drawing out the trades solely by stating how much of each item is traded in each of the three trades. I then increased the productivity of the tailor and thus the real relative prices became… 1 clothes = 2 bread = 4 meat. Here, the baker and butcher are wealthier because each of their goods purchases more clothing. But I don’t see how this makes the tailor wealthier. I then realized that while I was including marginal cost of production I didn’t include marginal utility - that since the price of clothing fell the baker and butcher would now order more clothing than before.
So, now I’m trying to create supply and demand graphs for each of the three trades to actual show this in real time so that I can get a clear visual in my head. But I’ms stuck because I can’t figure out what and how many supply graphs for each trade: 1, 2, 3, or, 4. What should be on teh x and y axis, and how everything should look. I’ve thought through everything But I don’t see it.
I tried having only one graph for each trade. Say, for the baker/butcher trade meat horizontally and bread vertically. Each of them would thus have one line outlining their preferred deals, with the equilibirum being the one the come to. However no matter how I set up the lines they are internally incosisntent.
When the tailor doubles his clothing production the cost won’t half. The cost will decrease but always at a slower rate than the production increases.
So if the tailor now produces 3 times as many cloths, they may be worth half as much, not one third as much. Does this resolve your problem of how the tailor ends up wealthier? How much a good decreases in value as production increases depends on the good but it will always be somewhere between no change in cost and the production amount but never equal to those two.
So if you made 100 shirts in a day originally and they were worth $1 each and then you started making 200 shirts in a day their new value would be ($0.5, $1). Note the ( and not [ indicating that they will not be worth $1 or $0.5, only something in between those numbers.
I think so, I have a rough idea in my head of what’s going on. But I’m going to continue trying to graphically portray this through a supply and demand graph of barter trade.
Thank you for all your help!
Lets say the tailor originally made two shirts every six months. The other guys have to buy new shirts every six months due to wear and tear. Then the tailor doubles his productivity and makes four shirts.
When the other guys wear out their old shirts, there is no reason for him to sell his shirts any cheaper. Why should he? Even though he has more shirts in his warehouse, he knows they are willing to pay the old price for the first two shirts.
He then sells them the two extra shirts that came from his increased productivity for cheaper, knowing they don’t need extra shirts as badly.
What he gets for his extra shirts is his increased wealth, them having extra shirts is theirs.
Now to make sure we get what these supply and demand curves are about, let’s quote Hazlitt:
All valuation begins in the minds of individuals. We are accus-
tomed to saying that market value is determined by supply and
demand, and this is as true of money as of other commodities**. But**
we should be careful not to interpret either supply or demand in
purely physical terms, but rather in psychological terms. Demand
rises when people want something more than they did before. It
falls when they want it less. Supply is more often thought of in a
purely physical sense, but as an economic term it also refers to
psychic factors. It may vary with price. At a higher price producers
may make more of a commodity, or be ready to offer more of the
existing stock for sale.
He’s saying that
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Supply= willingness to sell and Demand = Willingness to buy.
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Make no mistake, supply is also a subjective thing. Of course it is influenced by physical considerations, but it’s ultimately exactly as subjective as demand.
When AE talks about how value is subjective, they don’t mean “But we are talking about the buyer. The seller is a robot, whose value scale can be determined with a mathematical formula and a chart.” The sellers willingness to sell [=Supply] is also subjective.
This depends on whose perspective you are drawing the graphs for.
From the perspective of the tailor, clothes in units should be on the horizontal axis (quantity of clothes supplied), and bread in units should be on the vertical axis (price of the clothes supplied in terms of bread).
Because of diminishing marginal utility, the supply curve (from the tailor) should be upward sloping, while the demand curve (from the baker) should be downward sloping.
From the perspective of the baker, the roles are reversed, so the quantity is bread and the price is clothes.
There should be a total of six graphs for all possible permutations of clothes, bread, and meat.
For a more detailed explanation, refer to this thread for the barter example (direct exchange):
[url]The Demand Curve]
I would also recommend you read the first few chapters of Man, Economy, and State by Murray Rothbard.
I figured it out!
I drawed out three s & d graphs, one for each trade. When productivity of the butcher happened the following occured…
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The value of meat relative clothes and bread goes down, as the supply curve of meat shifts down
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The demand for meat goes up.
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The total amount of bread and clothes that the butcher gets as income goes up, thus his real income goes up.
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The total amount of meat that the tailor and baker get goes up, thus their real income goes up
Fantastic!
Now, all I have to do is figure out how all this works with money! Will be back with more really annoying questions!