Supply Side Economics and the fallacy of the law of Supply and Demand

Discussion in 'Politics' started by Richard-H, Apr 7, 2010.

  1. Richard-H
    Offline

    Richard-H Gold Member

    Joined:
    Aug 19, 2008
    Messages:
    2,285
    Thanks Received:
    385
    Trophy Points:
    130
    Ratings:
    +510
    I've read that supply side economics is a theory that states that supply creates demand. A bit strange considering that overproduction has always been a big problem for manufacturers.

    Perhaps there's something else meant by 'supply-side' economics, known by only a few:

    The Law of Supply and Demand describes a simple bidding system, whereby, it is assumed that the supplier of a product has some abundance of that product and want to sell it for maximum profit. So they make it available on the market. Buyers effectively bid on it. The more a buyer needs it or wants it, the more they are willing to pay for it. Now, it is also assumed that there are costs to seller associated with not selling the product, so the seller will tend to lower the price in order to sell off all (or nearly) of the product.

    These force the amount paid in the supply vs. the demand for the product to balance out in a way that maximizes profit for the seller while holding the price down for the buyers.

    In a hypothetically perfect economy this is how it would be, but not in the real world:

    What happens to the law of supply and demand when there is one portion of the people who have outrageously more wealth than the majority of the people?

    The law of supply and demand falls apart.

    In a society that has a huge disproportion in the wealth distribution, the wealthy can and do spend more for a product than it would otherwise sell for in a society of relative equal wealth.

    Why do the wealthy spend more? Prestige, whims, and just because one dollar and a thousand dollars isn't very much different to them.

    So what happens to the supply side? More production costs more to the produce. By increasing the profit per unit sold the producer/seller needs to produce less to make an equal profit. So they cut back on production and lay people off - sending the economy into a recession.

    Of course, since they control the supply side of the law of supply and demand, they get to determine how much is produced and for as long as there are wealthy people out there, to set the price at whatever they'd like - unless of course there's a chance of political repercussions leading to government regulation.

    This in turn lead to a situation where the producers/sellers become the very same wealthy class that is willing to pay enormous prices.

    In the end the society is divided between two economies - one for the wealthy and one for everyone else.

    Large corporations, with irresponsible managers along with government willingness to pay inflated prices contribute to this problem.

    Now, the typical answer to this assertion would be: free market competition. Nope.

    Business people in a free market aren't stupid. The last thing they want is to cut their own throats. So free market competition doesn't drive prices down the way it should. In fact, most markets are divided between three to about six major players, and though they may compete a little for small changes in market share, they only really need to lower prices enoughto make it unattractive for new competitors to enter the market. Besides that they keep the prices high as they can.

    And so why hasn't the economy collapsed? Well, it finally did. The reason that it took so long to collapse after supply-side was initiated was due to CREDIT.

    Credit served to falsely keep our economy afloat by giving the working class more buying power than they could really afford. This resulted in a slow but steady trickle up of wealth in the American economy.
     
    • Thank You! Thank You! x 2
  2. uscitizen
    Offline

    uscitizen Senior Member

    Joined:
    May 6, 2007
    Messages:
    45,941
    Thanks Received:
    4,791
    Trophy Points:
    48
    Location:
    My Shack
    Ratings:
    +4,807
    Advertising mostly creates the demand except for essientials like food, and energy.

    Greed mostly creates the demand in the stock and commodities markets.
     
    • Thank You! Thank You! x 1
  3. Care4all
    Offline

    Care4all Warrior Princess Supporting Member

    Joined:
    Mar 24, 2007
    Messages:
    32,791
    Thanks Received:
    6,624
    Trophy Points:
    1,170
    Location:
    Maine
    Ratings:
    +11,110
    Richard

    Let me begin by saying, THIS IS WHY Competition is critical, for capitalism to function properly...

    if you have competition, and there are not duopolies or monopolies or coercion between manufacturers in a sector that keeps supply short, so to keep prices higher...then supply and demand can work...only I am NOT a supply sider, I believe DEMAND drives business, not supply.

    you also have one part that is missing....the more you produce, the more profit available to make is also an approach....

    Cutting supply does increase the retail of the product...look at refineries for gasoline, they limit themselves in order to make more money per gallon....so they intentionally reduce supply to increase the price,

    but with widgets, this does not necessarily increase the profit made on the item...production costs per widget made is much higher, if you make less of them or have a lower supply of them....if you increase your supply then your prorated production costs go down per widget, thus giving you the ability to either make more profit per piece,

    or reduce the retail, sell a heck of alot more of them and also make the same profit as you would have selling fewer, with higher production costs, and with a higher retail that compensated for the higher cost of goods.

    So, basically...if there is competition, prices will come down, and the masses will get to buy all those things that at one time when first introduced, were way too expensive for the average joe....

    The wealthy are our "test markets"....they buy things when they are in prototype, expensive and new and give us a great read on where to go with product for the masses.
     
    • Thank You! Thank You! x 2
  4. MarcATL
    Offline

    MarcATL Gold Member

    Joined:
    Aug 12, 2009
    Messages:
    15,351
    Thanks Received:
    2,359
    Trophy Points:
    245
    Ratings:
    +3,749
    WoW!!!

    You totally NAILED it!

    We're not worthy, we're not worthyyyyy!

    :clap2::clap2::clap2::clap2:
     
  5. uscitizen
    Offline

    uscitizen Senior Member

    Joined:
    May 6, 2007
    Messages:
    45,941
    Thanks Received:
    4,791
    Trophy Points:
    48
    Location:
    My Shack
    Ratings:
    +4,807
    Do the commodity markets largely neutralize competition and supply and demand in the products traded as commodities?
     
  6. MarcATL
    Offline

    MarcATL Gold Member

    Joined:
    Aug 12, 2009
    Messages:
    15,351
    Thanks Received:
    2,359
    Trophy Points:
    245
    Ratings:
    +3,749
    Uhm...he covered competition in the free-markets. Did you miss the part where he stated that they only drop the price enough to make it unattractive for new competition to enter the market and that in almost every industry only a select few are the suppliers?

    Do you also not observe this to be the case in reality?

    You really should pay closer attention.
     
  7. Care4all
    Offline

    Care4all Warrior Princess Supporting Member

    Joined:
    Mar 24, 2007
    Messages:
    32,791
    Thanks Received:
    6,624
    Trophy Points:
    1,170
    Location:
    Maine
    Ratings:
    +11,110
    They do, even though they are not suppose to....or even though this is really NOT the way Capitalism is suppose to work...

    look at OPEC....wrong wrong wrong wrong and bad bad bad bad for capitalism...

    they purposely control what they produce or supply to keep the prices UP UP UP on the global market.

    and another BIG CULPRIT is our GOVERNMENT....and I know that people don't want to hear this from my side of the aisle, but governments through legislation can limit supply...not allowing to drill everywhere and anywhere, also keeps prices higher...the oil companies really don't want to drill on usa owned land or sea....and our congress has created this atmosphere as though it is a war between the environmentalists and the oil companies, but truthfull that is just PR....they really do NOT want to drill drill drill baby, imo! This will reduce their price of oil....unless oil is at a very high price, it is not worth it to them....

    we have something like 40 million acres of usa owned land leased out to them for drilling and less than half after many years of having the leases, have even begun exploration....they are buying up the leases and then NOT DRILLING, and not allowing other small companies come in and drill on this leased land....

    And another example, are DOCTORS...the government along with doctor special interest groups, limit our medical school sizes and limits the students each year allowed in to medical school and limits doctors by our board and licensing processes.

    Now, you can say on both of the above samples, that government intervention is very necessary...

    but KNOW, that this DOES affect the prices we end up paying for things...
     
  8. Care4all
    Offline

    Care4all Warrior Princess Supporting Member

    Joined:
    Mar 24, 2007
    Messages:
    32,791
    Thanks Received:
    6,624
    Trophy Points:
    1,170
    Location:
    Maine
    Ratings:
    +11,110
    look around you Marc....

    people with very little money, have all the gadgets of today...everyone has a cell phone...10-15 years ago that was not the case because they were too expensive, only the wealthy could afford them and the phone plans being offered...

    not the case today....

    I am not denying that there are the haves and have nots in certain areas, such as health care....or expensive cars, yachts, homes yah dee dahs that we will never own, just that with MOST of the things we buy, capitalism is working to keep prices low....

    we may have no manufacturers left in America.... :(

    but prices are still low and the masses can buy most anything at a cheap retail...

    I don't see the peple with all the money and those of us with much less, stopping the retail wheel from turning, as richard seems to.
     
  9. Richard-H
    Offline

    Richard-H Gold Member

    Joined:
    Aug 19, 2008
    Messages:
    2,285
    Thanks Received:
    385
    Trophy Points:
    130
    Ratings:
    +510
    The more you produce the more you HAVE to sell or suffer a loss. Risk is higher. Prices have to drop so the next lower tier of buyers will buy it. Profit per unit goes down. More time has to be spent producing and selling, the complexity goes up for the seller...less time with the family on the beach....who wants to work 325 days a year when they can work 200 days and have more piece of mind?


    Gasoline and other necessities are prone to political consequences and therefore government intervention.

    To a point producing more is more profitable, but that only becuase the initiate costs, like research and development, and tooling the production line are spread over the entire production run. But that's only up to a point. If prices and profits can be high enough those costs are made up for preety quickly.

    I agree that the wealthy do serve as a test market, but that really doesn't have to be that way. There are plenty of non wealthy people that would love to test market products - they can't afford it.

    One of my favorite examples - one that I'm passionate about, but that serves as a very good example of how markets truly work is the guitar market. It is not prone to government intervention.

    It takes anywhere from $25-$350 to produce a guitar. From an engineering/production point of view, there really isn't any difference in production costs between the lowest and the highest priced guitars. They're made of wood, albeit different types of wood, but most wood. They have a couple of cheap to produce electronic parts, but again the production costs between the worst and best quality isn't very much.

    The biggest factor in producing a quality guitar is whether the manufacturer knows how to use a ruler - or misuse it. No matter what the materials are a guitar whose proportions are wrong is going to sound lousy and a guitar whose proportions are correct will sound at least pretty good.

    One thing is for certain, the materials, workmanship and technology that it takes to produce a top quality guitar are not even close to that of a desktop PC.

    Yet good Desktop PCs sell for around $800. While top quality new guitars sell for $3,500-$10,000. I've seen them as high as $30,000.

    Meanwhile most guitars that sell for under $1000 are intentionally misproportioned so that they will never sound good. (A few companies are exceptions).

    The reason is that there are so many super wealthy people in our society (most of whom are beginner gutarists), who pay outrageous prices just for prestige.

    Now, if you were a guitar manufacturer, would you rather work 325 days a year, produce 100 guitars and sell them for reasonable prices or would you rather work 75 days a year, produce 10 guitars and sell them for outrageous prices?

    There are a few companies that are competitive, most once they get a name, their prices soar.

    This is how business works.
     
  10. uscitizen
    Offline

    uscitizen Senior Member

    Joined:
    May 6, 2007
    Messages:
    45,941
    Thanks Received:
    4,791
    Trophy Points:
    48
    Location:
    My Shack
    Ratings:
    +4,807
    You figured out the secret Bush energy policy :clap2:

    High oil prices also make the GDP and productivity numbers look good.
    And hurts the lower working classes the most.
     
    Last edited: Apr 7, 2010

Share This Page

Search tags for this page

falacises of supply side economics

,

supply side economics discussion board