Huckleburry
Member
Gang,
Please look up the marginal propensity to consume before arguing against it, I have tried to explain it numerous times to no avail, the reason it is so important is that it is the cornerstone of standard theory which is what our market is based on. This being true it is probably a good thing to understand.
All that aside I am going to try a different approach. Take out a pen and a piece of paper and draw a graph, put quantity of good x per period of time on the x axis and price on the per period of time on the Y axis. Now draw an upward sloping supply curve and a downward sloping demand curve. We have just made two important assumptions. In regards to supply we have assumed that as price increases suppliers will want to supply more. In regards to demand we have assumed that as price decreases we consumers will want to consume more.
Ok, Now Shift the demand curve outward and watch what happens to the quantity supplied. Notice that it increases this translates into growth throughout the economy; this is what I am talking about when I refer to an outward shift in the market demand curve. MPC is a measure of the spending behaviors of different demographics, it is a solid measure supported by empirical evidence which is why so many folks pay so much attention to it. Now return the demand curve to its original position, D, and instead shift the supply curve outward. Notice the increase in demand; this is what supply side is talking about on a macro level (which is really the only important thing in fiscal policy debates). Unfortunately for that shift to occur on the supply side we have to assume that firms behave like consumers which we know to be untrue. Firms are profit maximisers while consumers are utility maximisers the difference is an important one, and here is why. Consumers use additional income to jump to a new utility curve translating in to increased consumption and increased demand (outward shift in demand curve) Suppliers on the other hand have no other incentive than profit maximization (which is achieved where marginal revenue = marginal cost) if economic profits are realized because of tax cuts or government stimulation than that is terrific news. However there is still no incentive to increase production, because MR=MC. Those economic profits will be banked and the firm and its share holders will post an impressive year. The question of the market supply shift will go unanswered, some firms may increase supply, and some may not. The important thing though is that it will not automatically happen on the supply side where as it will automatically happen on the demand curve.
I know my argument takes a very theoretical stance and if you choose to disagree with the theory, fine, however in arguing for or against supply side it is important to know that it is a child of the same theoretical frame work, and it lives or (more accurately) dies by the same assumptions. The original writings on supply side were interesting, ideological even; however empirical evidence did not support the theory, a fact which was unfortunate. Standard theory has its flaws, however until something better comes along it is the most useful model we have.
Cheers
HUCK
Please look up the marginal propensity to consume before arguing against it, I have tried to explain it numerous times to no avail, the reason it is so important is that it is the cornerstone of standard theory which is what our market is based on. This being true it is probably a good thing to understand.
All that aside I am going to try a different approach. Take out a pen and a piece of paper and draw a graph, put quantity of good x per period of time on the x axis and price on the per period of time on the Y axis. Now draw an upward sloping supply curve and a downward sloping demand curve. We have just made two important assumptions. In regards to supply we have assumed that as price increases suppliers will want to supply more. In regards to demand we have assumed that as price decreases we consumers will want to consume more.
Ok, Now Shift the demand curve outward and watch what happens to the quantity supplied. Notice that it increases this translates into growth throughout the economy; this is what I am talking about when I refer to an outward shift in the market demand curve. MPC is a measure of the spending behaviors of different demographics, it is a solid measure supported by empirical evidence which is why so many folks pay so much attention to it. Now return the demand curve to its original position, D, and instead shift the supply curve outward. Notice the increase in demand; this is what supply side is talking about on a macro level (which is really the only important thing in fiscal policy debates). Unfortunately for that shift to occur on the supply side we have to assume that firms behave like consumers which we know to be untrue. Firms are profit maximisers while consumers are utility maximisers the difference is an important one, and here is why. Consumers use additional income to jump to a new utility curve translating in to increased consumption and increased demand (outward shift in demand curve) Suppliers on the other hand have no other incentive than profit maximization (which is achieved where marginal revenue = marginal cost) if economic profits are realized because of tax cuts or government stimulation than that is terrific news. However there is still no incentive to increase production, because MR=MC. Those economic profits will be banked and the firm and its share holders will post an impressive year. The question of the market supply shift will go unanswered, some firms may increase supply, and some may not. The important thing though is that it will not automatically happen on the supply side where as it will automatically happen on the demand curve.
I know my argument takes a very theoretical stance and if you choose to disagree with the theory, fine, however in arguing for or against supply side it is important to know that it is a child of the same theoretical frame work, and it lives or (more accurately) dies by the same assumptions. The original writings on supply side were interesting, ideological even; however empirical evidence did not support the theory, a fact which was unfortunate. Standard theory has its flaws, however until something better comes along it is the most useful model we have.
Cheers
HUCK