NCC1701
Gold Member
- Jul 3, 2016
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I am not going to take on all of this, just for now I would like to point out that economics is not a science, it only has the veneer of science. At its heart economics is psychology with money. We could tackle that as a topic all its own, maybe later. You like to be precise, as do I, so I am going to focus down on just one point that illustrates just how bad economics really is as a discipline.
Supply demand equilibrium does not exist, never has existed. That fantasy is used time again and taught as gospel. The fact is markets are NEVER in equilibrium, NEVER. I am a trader and I have never seen any market reach equilibrium in over 20 years. I have followed corn, silver, gold, oil, stocks, bonds, currency cross rates, cattle, and even pork bellies. If you think about it, you are asking millions of people to all simultaneously agree on price, with a vanishing bid-ask spread.
The lesson is that econ is full of fallacy and religion, were it not then all these geniuses like Yellen would never have let 2008 happen in the first place, let alone be surprised it happened.
Green:
I beg to differ. So does Robert Schiller. Nobody thinks economics is a natural science as is physics or chemistry, or even math, which strictly is a language, namely the language used to describe as precisely as we are able the structure and/or behavior of things and humans. That said, attacking, discrediting, or questioning the findings/theories/models (science sense of the word) of rigorous economic inquiry and analysis on the basis of whether the discipline is or isn't a science is ridiculous and logically fallacious. Attacking a given finding (or set thereof) on the basis of it's not withstanding critical analysis, on the other hand is valid and sound.
Now that isn't to say you, I, or others cannot think whatever the hell we want to think about a given economic theory or prediction; we each can do that at will and with abandon. What matters, however, is whether what we each think is the result of rigorous critical analysis, not anecdotal analysis for example, that shows an economic theory, finding, or model to be invalid. Which one legitimately invalidates -- a whole theory, a specific finding that is part of a theory, or a specific model used to apply the theory in a predictive sense -- determines just how far one can "go" in saying there is something amiss. If I use "such and such" an economic model, say, to predict the demand for "tiddlywinks," your rigorous analysis may show that the model I used included or omitted a relevant factor, or that I included an irrelevant factor. Your doing that will legitimately invalidate my results, but it's not going to alter the validity of the theory I attempted to model. In other words, you will have shown that I misapplied/misinterpreted the theory, not that the theory I was modeling is flawed.
Pink:
You're remarks about equilibrium price imply (by your choice of verb tense) that equilibrium price is something that exists as a static sum. It is not. So what is the equilibrium price? In short, it's just the selling price of a good/service at any given point in time.
For every exchange, a seller provides a quantity of goods and a buyer demands the exact same quantity of goods. Thus the equilibrium price is achieved in every single transaction that happens. The fluidity/constancy of equilibrium prices varies.
- It is the sum a buyer pays and a seller accepts in any given exchange.
- It is the sum paid when a buyer and seller agree to an exchange of a defined quantity of resources at an agreed upon price.
I'm surprised you, as a trader of "whatever," have written the "pink" remarks. Each time we hear quoted the price of a stock or commodity, for example, we are being told exactly what the equilibrium price for that item is at that point in time. When the next buyer and seller execute the next exchange of the item, the exchange may occur at the equilibrium price "we all just heard on the radio" or it may occur at a different price. No matter at what price it occurs, that sum will be the then current equilibrium price.
- When a store has a shirt offered at $50 and buyers buy it for $50, that is is the equilibrium price. What does it mean when a buyer agrees to buy multiple shirts instead of only one shirt for $50? It means the demand curve for that buyer and the supply curve for the seller each have shifted, the demand curve having shifted "up" and the supply curve having shifted "down/left." (See Graphs 6 and 8 below) That corresponds to demand shifting from curve D2 to D1 and the supply curve shifting from S2 to S1. (Sorry, but I'm not going to build my own graphs that have the correct line identifiers and movement arrows on them.)
Graphs 5 and 7 can be used to understand what happens when the quantity supplied/demanded is held constant and the selling price is what changes. When do we observe this happening? When the price of a good/service increases and a consumer (or consumers in general) buy just as much of it.
Do not confuse a shift in supply or demand with a change in the quantity supplied/demanded (see also: What Factor Causes a Change in Quantity Supplied?). (Shifts in one or the other curve vs. movements along a given curve.) The latter is what happens when the quantity a seller is willing to supply changes because the selling price has changed. The first graph below illustrates a change in the quantity supplied, the second illustrates, again in isolation, a change in the quantity demanded.
When do we observe this behavior -- a change in the quantity supplied -- on the part of a seller? To answer that question, consider what circumstance would lead a supplier to offer to sell two units a the same price it was formerly willing to sell just one. Alternatively, consider when a supplier would sell one unit at the price for which it used to sell two. What makes that happen? A shift in demand, not a change in the quantity demanded.
When do we observe buyers buying a higher quantity? Here again, consider when you would buy more of a good due to a change in the price. What makes that happen? A shift is supply, not a change in the quantity supplied.
The same thing is what's going on with movements along the demand curve. The second graph above illustrates a change in the quantity demanded.
What're the key take-aways about the distinctions?
- That more quantity is supplied/demanded at every price along a curve when there is a shift in supply/demand. One can see this by drawing horizontal lines across the graphs. (Don't get confused. Even though the graph "looks" like price is a function of quantity, it is not. One can Google to find out why economists "flip" the axes.)
- Movements along a given curve are what happens when "the other" curve shifts. It's nifty to discuss them, but they aren't what happens very often, yet they happen more than "very rarely."
- The graphs above and how to interpret them don't change merely because we move from discussing one buyer and seller to discussing a market as a whole. You surely have seen this as a trader. What is/was the equilibrium price of, say, pork bellies last hour, yesterday, this morning, etc.? It is whatever they were selling at at that point in time. Is the equilibrium price constant for pork bellies? For a brief moment in time, yes, but not for any defined span of time.
What does that tell us about the graphs we see? It tells us that they reflect the market at a single point in time and that if we are of a mind to look at the graph (equilibrium price) of a given market, seller or buyer, whichever it be we seek to analyze, we need to aggregate the graphs over a period to arrive at a summary depiction that will have what amounts to an average equilibrium price for that period of time.
I'm not really sure what motivated your making the "pink" remarks.
I don't really know. What I do know is that your central notion in the "pink" text is just nuts. Every time there is an exchange, an equilibrium price is achieved.
- Perhaps what you are trying to communicate is the idea of determining what is the demand curve and supply curve for a given pair of buyer and seller or for the market as a whole?
- Perhaps you're remarking on the fluidity of equilibrium prices and conflating the fact that selling prices change "constantly?"
- Perhaps you are alluding to a common misperception about economics, the mistaken idea that it's charts and graphs, as we see them in texts, predict specific behavior of specific individuals in specific situations at specific points in time rather than explaining how people in general behave in response to scarcity, choice and imperfect information?
- Perhaps you're reflecting on the element of uncertainty given by the fact that that we cannot and do not define or know the supply and demand curves for every buyer and seller in every situation?
- Maybe some combination of the the things above? Maybe some mix of them and/or other things? Maybe something altogether different?
Note:
Do not confuse the various types of demand. In general economics parlance "demand" is synonymous with "buy," except in explicitly identified instances, one such being when the context is not effective/actual supply and effective/actual demand situations but rather implied demand/supply situations. One example of that sort of situation is when, say, a State Highway Administration solicits economic guidance about what will be the demand for a new road so they know how many lanes to make it, what and where entrances to it and exits from it should be built, and from "where to where" to build it. That is an example of derived demand.
A. You: Nobody thinks economics is a natural science as is physics or chemistry, or even math, which strictly is a language, namely the language used to describe as precisely as we are able the structure and/or behavior of things and humans. That said, attacking, discrediting, or questioning the findings/theories/models (science sense of the word) of rigorous economic inquiry and analysis on the basis of whether the discipline is or isn't a science is ridiculous and logically fallacious. Attacking a given finding (or set thereof) on the basis of it's not withstanding critical analysis, on the other hand is valid and sound.
You just constructed a self refuting argument. We agree it isn't a science, but you go on to conclude it is therefore rigorous. That is a contradiction, science is the only known way to rigorously attack a subject, therefore it is not strictly rigorous. Ever wonder why there is never agreement or it lacks predictive power?
B. I stated that equilibrium does not exist, then you go on to restate the standard religion....
For price to be in equilibrium as defined by you, it must trade at constant price over a period of time t over many trades AND depth of market must vanish. Depth of market is the order book for all limit orders currently in place in any given market. There are always many orders above and below the market, it never vanishes, ever.
Supply and demand curves are crap, there is only supply known at a point in time and that is only what producers want you to know about. Demand is unknowable, there is a lot of speculative demand that can change on a whim.
You also miss the fact that people buy and sell things based upon perception of the future, which is also highly volatile and the future is unknowable.