Supply/Demand

Economics Economics Questions
1

This should not be a controversial question, just an englightenment of my ignorance.

I recently found this quote:

“Poor people don’t go without [bread] because rich people have a lot of money; they go without because the middle class buy up all of the goods.”

This brought to mind questions of supply/demnd and how it works.

Generally, as demand increases, prices can also go up. Right? But if the demand is really low, prices are also high.

For example:

If everyone wants an iPad, and Apple has a limited supply, it raises prices. But initially, the iPad is really expensive - until the demand increases, when Apple can afford to increase costs because a lot more people will buy the stuff.

So I’m confused: when do prices go up? Am I ignoring the supply aspect?

Because I’d really like the quote to be true. If the middle class buys up all the bread, then prices go up because of scarcity. But if the middle class hardly bought any bread the market for bread would be smaller, with less competition to drive down prices.

Full link:

http://www.whoisjohngalt.com/2011/04/understanding-class-warfare.html#more

2

“Every innovation makes its appearance as a luxury of the few well-to-do. After industry has become aware of it, the luxury then becomes a necessity for all.”

-Ludwig von Mises (check out Quotable Mises)

Yes you’re basically ignoring the supply aspect, and maybe one or two others. Have a look at the quote from Mises above and watch the below video:

FIrst of all you have to recognize there is a difference between “costs” and “prices”. A company would never intentionally increase its costs. As you said though, if demand is outpacing supply, the price will increase. As supply increases and demand stays constant (or increases slower) you’ll see the price decrease. The only reason prices for new items are initially expensive is because they are usually much more cutting edge, and the input costs are much higher. As time goes on, input costs go down (as technology advances) and economies of scale allow production of more of the same good at a lower cost…therefore prices go down.

3

The more wealthy you are, the more likely you would switch to higher quality substitutes.

Example: The poorer person would buy canned fruit, lower quality meats, white bread.

The middle class person would buy fresh fruit, would buy medium quality meats, and perhaps spend money on a fancy french bread.

The rich would buy the highest quality imported fruits, the highest quality meats, and buy bread with gold flakes on it.

In the case of goods with many substitues, the “three classes” (if you want to split them up that way) are not even demanding the same goods. Why would the rich/middle class buy all of the canned fruit?? Hint: They wouldn’t.

It is always in the entrepeneurs interests to expand into untapped markets, so the entrepeneur is always trying to bring higher quality goods for lower prices, or introducing a good where it didn’t exist previously.

To get a basic grasp of Supply/Demand, I would recommend reading Lessons For The Young Economist, Chapter 11:

When there are large profits being made, it is a signal to entrepeneurs to enter the market. So let us say all of the middle class/rich people begin buying up all the white bread in existence. This will cause entrepeneurs to begin focusing more resources towards the white bread market, which will in turn drive down the price/profits.

The poor would still need to eat, so they would either shift to some other type of bread/food that now becomes cheaper… or cut elsewhere in their budget to continue buying the white bread.

I would say you also need to look at the entrepeneur’s side of the equation. There is a reason it is called Supply AND Demand.

4

Thanks for the replies, guys. And JJ, I had already seen that video (that’s why I used an iPad as an example).

So is the argument presented in the quote valid?

5

Supply and demand is the one case in economics where I really believe that graphs can be helpful

Now part of the problem with modern economics is that they focus too much upon a “static” or unchanging model and they overlook the changing process of the market, so you still have be careful with supply and demand.

So anyway, an increase or a righward shift in demand will mean that more people are willing to pay more for whatever we’re talking about at any price, this will mean that if supply remains the same then there will be a larger quantity demanded at a higher price so long as supply isn’t totally elastic which would mean the curve was verticle, so no matter what the price will increase and the amount on the market will almost certianly increase as well.

Let’s pretend that we’re talking about bread here, well in the long run if this happens then more people will try to supply bread, the supply curve will shift outward and to the right which means that more will be supplied at any price, therefore the price will fall and the amount supplied will also go up. This will happen insofar as the profit motive rises . For instance if the increase in the price rise doesn’t cover costs then farmers won’t switch to making bread and in the supply curve will not shift.

But anyway this cannot be answered a priori, in the short run if the entire middle class stopped consuming bread then the price would drop down to practically nothing, but in the long run the reverse of what I just talked about would happen, the demand curve would shift to the left which would mean the price would fall dramatically and the quantity supplied would as well, in the long run many farmers would probably abandon bread making altogether and so the supply curve would shift to the left. Whether or not in the end this would mean that prices would be lower for those who still consumed bread can’t be known, that would depend upon specific market data and actors.

6

I guess I don’t really see what you’re not getting. “Poor people don’t go without [bread] because rich people have a lot of money; they go without because the middle class buy up all of the goods.”

I mean, I guess technically that’s true…it’s basically saying “there isn’t enough bread to go around because there isn’t enough bread to go around.” Think about it. If I had an incredible bread machine that could make bread out of nothing, there would be an abundance of bread. It would be everywhere. There would be more bread than people could eat. Therefore, supply in relation to the demand would be really high…this means price would be very low…maybe even free. This would mean people could have as much bread as they wanted.

Obviously, that machine doesn’t exist…so bread is more scarce than that. Therefore it commands a higher price. (But when you can get it as low as $1/loaf, I’d say that’s pretty abundant). I guess the way that quote is worded just throws focus off a bit because it seems to place “blame” for poor people being poor. It seems to subtly suggest that “if only that greedy middle class wasn’t so greedy, there would be enough bread to go around.” Which is bullshit. You don’t increase prosperity by decreasing demand. (Nor do you increase it by increasing demand…despite what the Keynesians say). You increase it by production. Think about it. By the logic implied in that quote, we could all be 33% wealthier if we just ate two meals per day rather than three.