Inelastic & Elastic Deman Curves

[eagleseven]

'Unite'? Are not they two mutually exclusive things, based on their very natures?

Not necessarily.

Austrians discount Neoclassical theory because they maintain that mathematics cannot effective describe economic behavior. Neoclassicists discount Austrian theory because the Austrian school cannot be mathematically tested.

Is either view 100% correct? Most definitely not. While the chief economists behind each school of thought were diametrically opposed, nothing is stopping a modern economist from combining the most accurate and useful insights from both schools.

In particular, I am suggesting that we use Neoclassical models as a baseline, and attempt to use the Austrian perspective to explain how reality differs from the models, and adjust the models accordingly. Though sacrilege to the fundamentalists of each school, I believe this to be the future of economics.

 

[eagleseven]

Case in Point: Business Cycles

Austrians blame boom-time mal-investment and credit expansion. Yes, there appears to be a loosening of credit and irrational movement into poor investments before a recession (dot-coms, housing, etc).

Classicists blame environmental shocks (regarding the Earth's resources) and government-induced bubbles. Yes, environmental shocks often accompany recession (1970s), and there are dozens of examples where bad policy leads to economic ruin (USSR, Zimbabwe, etc).

Keynesians blame asymmetrical information and demand fluctuations. Yes, aggregate demand shifts as societies make rash choices based upon asymmetrical information.



Each school has identified various things that occur before, during, and after recession. Which are the causes, which are the effects? It seems to me that all of these theories are addressing facets of the same stone...now we need to pull back and identify the stone.

There are alternative theories for the business cycle as well, including the Real Business Cycle Theory (haha) and the Instability Hypothesis. These new theories, regardless of their merit, have been pre-emptively shot down by adherents of the above schools.

 

[code1211]

Case in Point: Business Cycles

Austrians blame boom-time mal-investment and credit expansion. Yes, there appears to be a loosening of credit and irrational movement into poor investments before a recession (dot-coms, housing, etc).

Classicists blame environmental shocks (regarding the Earth's resources) and government-induced bubbles. Yes, environmental shocks often accompany recession (1970s), and there are dozens of examples where bad policy leads to economic ruin (USSR, Zimbabwe, etc).

Keynesians blame asymmetrical information and demand fluctuations. Yes, aggregate demand shifts as societies make rash choices based upon asymmetrical information.



Each school has identified various things that occur before, during, and after recession. Which are the causes, which are the effects? It seems to me that all of these theories are addressing facets of the same stone...now we need to pull back and identify the stone.

There are alternative theories for the business cycle as well, including the Real Business Cycle Theory (haha) and the Instability Hypothesis. These new theories, regardless of their merit, have been pre-emptively shot down by adherents of the above schools.

I feel like i just earned a college credit.

 

[editec]

Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve?

What do ya'll think?

You're kidding, right?

Presumably, the businessman has already found the sweetest spot in price/demand curve of an less price-elastic product.

Ergo, should he raise the price, the market demand would go down, thus decreasing his net profits.

Obviously in a product with a more price elastic propensity, he will raise prices until he finds that sweet spot on the curve that maximizes his profits.

One of the things I think some people fail to realize about health care is just how inelastic it really is.

Facing death or some horrid HC outcome, people will spend every cent they have to avoid that outcome.

There is no good substitution, for example, for a heart that works, or a kidney, or leg or arm

Most of what some of think we know about the ironclad laws of supply and demand, does NOT really hold true in the case of health care.

 

[The Rabbi]

Why is it that a profit-maximizing businessman would always raise prices when facing an inelastic demand curve, but might or might not raise prices when facing an elastic demand curve?

What do ya'll think?

You're kidding, right?

Presumably, the businessman has already found the sweetest spot in price/demand curve of an less price-elastic product.

Ergo, should he raise the price, the market demand would go down, thus decreasing his net profits.

Obviously in a product with a more price elastic propensity, he will raise prices until he finds that sweet spot on the curve that maximizes his profits.

One of the things I think some people fail to realize about health care is just how inelastic it really is.

Facing death or some horrid HC outcome, people will spend every cent they have to avoid that outcome.

There is no good substitution, for example, for a heart that works, or a kidney, or leg or arm

Most of what some of think we know about the ironclad laws of supply and demand, does NOT really hold true in the case of health care.

I was waiting for some Nimrod to come along and expose his ignorance.
And here you are.
Most health care delivered is not in the category of organ transplant or what have you. Most of it is minor fixable stuff. I dont know how many times I've heard "Ive got this cold I've had for 4 days and it isn't getting better. I'm going to my doctor."
When people are paying for health care they are much smarter users of it all around. So supply and demand really does play into it.

 

[eagleseven]

One of the things I think some people fail to realize about health care is just how inelastic it really is.

In the US, healthcare is as inelastic as cigarettes (0.3).

Inelasticity is no argument for the nationalization of an industry.

 

[enigmablue]

When you consider elasticity then you are looking, in detail, at forces in the market place and those which influence the consumer. You can't sell where there's no perceive demand or need. Yeah ... it comes back, to a degree, to advertising. It's necessary to create a need to sell a product.

So you get into treating economics as a matter largely dealing with human psychology? Isn't that about where the Austrian line of thinking comes into play?

*thumbs up* You're right on the money. Human psychology plays a part. Not necessarily the biggest, however, one which economics must heed. If you want a dramatic example then take the crash of Wall Street. Globally there was a loss of confidence no matter the chances of a bounce back.

 

[Vanquish]

Having spent the better part of a year researching/publishing a study on the Russian Hyper-Inflation of the early 90's, I can tell you government/municipal market actors fall prey to the same irrationality of purpose.

 

[The Rabbi]

Having spent the better part of a year researching/publishing a study on the Russian Hyper-Inflation of the early 90's, I can tell you government/municipal market actors fall prey to the same irrationality of purpose.

But it's only irrational in retrospect, right? At the time it seems perfectly rational. That is my recollection of most of this. Cisco trading at a bigger market cap than GE? Makes perfect sense because (fill in the blank). Buy houses with no money down? Sure, because real estate historically has always gone up.
There is always a "good reason" why "this time it's different." It's only after the disaster that we learn that "this time" is just like last time.