Well, since I specifically said that they
cannot operate at floor, then your read is incorrect.
I am sorry, I don't mean to misquote you.
I shouldn't have dumped all of this on you. It was something that I was thinking about for my list of "things I have learned from the internet." I have now posted my list above ^^ this somewhere. I am not disowning what I said, I am just saying that it wasn't responsive to your post.
I understand the concept of a floor that a provider can't operate under for a long time. I also understand that there are many different things considered costs. Someone here, who shall remain unnamed out of fear that I haven't gotten every nuance of their twelve word statement right, mentioned recovery of sunk costs, costs for capital that has depreciated to zero, but is still in use. A machine for example. These kinds of costs don't have to be recovered in order for the business to survive a down period in revenues.The business is operating at a loss but the cash flow is such that more cash is coming than is going out, but the owners aren't receiving any profits.
But you do realize that supply and demand don't determine the price completely. This puts you ahead of quite a number here.
Sure. Because I recognize that the model is only an approximation, and that reality is more complex.
You believe that supply and demand set the price but that average (not marginal) costs provide some hazy, long term limit to how low they can go and the producer stay in business. You have the right idea, it is just that you have it reversed, almost all prices are set by the supplier at average cost plus an anticipated profit and supply and demand are the hazy, long term limits to the success or failure of the business.
It don't think it's necessarily one direction or the other. It's a feedback loop. The consumer deccision is an individual decision: Will
I personally purchase this product? Do
I personally value this product at higher than the cost? But the Seller's decision is an aggregate decision: Will
people in general purchase this product? Will
enough people value this product at higher than this specific price? Would more people value this product at higher then another price, by enough to make the net profit larger? So the Seller has to try to estimate the individual supply-demand driven choices of many consumers, and decide on what price works for them based on that estimation.
When it's two individuals negotiating, they each give a little and reach an agreement that is higher than the seller's floor and lower than the consumer's budget... or there's no sale. But in the market, each individual makes a purchase decision against their budget (and against the competitor's product as an alternative option), and the seller makes a pricing decision against the assumption of how many purchasers will be willing to make that purchase decision in their favor.
It's the same concept... but it's the difference between the individual negotiation and the aggregate process.
Or comparing a product at a price against a substitute that gives us a greater deal of satisfaction, utility in Econ speak, even if it isn't a direct substitute in function, that is, "lawnmowers are so expensive now then that expensive rifle that I want is worth the money, I will buy the rifle now and a new lawnmower next year."
Buying decisions are not the cool rational decisions that mainstream economics says that they are, that much of mainstream economics needs it to be. Neither is the marketplace a bazaar where prices are bid up or down by people who have complete knowledge about the products. Producers are price givers and consumers are price takers. We either buy the product at the price offered or we don't. The producer doesn't wait to see what price his product sells for in the market, he sets a price and he sees how many units he sells.
The government hasn't decided that is the best way to do it, the market has decided that this is the best way. If the government wasn't involved we have no reason to believe that the market would become a bidding type market, it would most likely chose once again to be a price giver, prices taker market, exactly what it is today.
We are talking about the aggregate here, the effect on the economy as a whole. The net sum of all of the individual transactions.
This is a common mistake, the idea that the economy as a whole reacts the same way as an individual or a single company does. That you can take how you or I react and multiply it by 300 million and then we know how the whole economy will react. Supply and demand is a different animal when you are looking at and talking about the whole economy. The limits, the boundary conditions are different, the biggest difference is the role of money itself, to you and me money is life itself, the means of survival in the modern world.
But to the whole economy money is only important to provide the incentives individuals need to grow the economy, to innovate and to optimize the economy. Money is just paper, the macroeconomy can make as much of it as is needed.
And supply and demand are different. All of us assume that aggregate demand is downward sloping, that is as the price goes down the demand goes up. But economists haven't come anywhere close to proving that this true, when you look at the whole economy. The closest that they have come is proving it for exactly the case that you did, one consumer choosing between two products. But as soon as they add more consumers the model starts telling them conflicting stories, that the demand curve is horizontal, that is price doesn't matter, or that it has inflection points where the curve reverses slope, products become more in demand the more expensive they are, or that the curve is discontinuous which would mean that demand is not solely dependent on price or that it might have a time variability, both things that the real world outside of economics takes for granted as being true as evidenced by the existence of advertising or the acceptance of the concepts of fads and style.
I am sure that this is a repeat in some form of something that I have said before. I know that I repeat myself, I have only an limited understanding of these things myself. There is no big payoff coming from me. I am not going to tell you the universal truth that unlocks the secret of economics. But what I do know with a high degree of certainty is that mainstream economics and the so-called free market is not going down the correct path. They have concocted a fantasy economy when what we need is to understand the real one that exists.
If you are a member of the free market cult this what you are what you are hanging your intellectual hat on. It is pretty much bullsh*t form beginning to end. Enjoy.
I don't think that a completely unfettered market is the correct answer for everything. I think that some industries cannot "self-regulate", and I think that some industries require oversight. But I also think that there are a great many industries that work just fine without external regulations.
I do think that the supply-demand model is the
best model for how and why people make the pricing and purchasing decisions that they make. The model makes certain assumptions regarding the degree of knowledge that is reasonably available by all parties in the negotiation, which is it's greatest weakness. But it seems to most accurately capture the process by which negotiation happens.
Once again, I didn't mean this as a response to you. I don't know what you believe beyond these few posts that I have read here.
You will have to explain to me what you mean by "But I also think that there are a great many industries that work just fine without external regulations."
If you mean that there are businesses that don't need regulations to force them to run ethically, that they would never try to form a monopoly or work children six days a week, 12 hours a day to lower their labor costs. I agree, I think that most companies are run ethically and don't need these regulations to force them to run their companies that way.
But they do need the regulations to make sure that they are not having to compete with companies that aren't so ethical.
In the same way whether or not the state that I live in has a law making armed robbery illegal has no bearing on whether or not I am going to commit an armed robbery. But I still want armed robbery to still be illegal and enforced to help prevent armed robberies and to reduce the chance that I will be robbed. The law is not what is preventing me from robbery, I don't need there to be a law to keep me from committing the crime. But I do need there to be an enforced law.
It is the same with regulations.
You have to be careful when you say that industries don't need to be regulated, especially if you mean it in the reasonable way that I outlined above. When the market fundamentalists say the free market doesn't need any government regulation, except to enforce contracts®™©, even for the other guy who might cut corners, they are making a very specific claim that the mechanism of supply and demand setting prices is strong enough that no other regulation is needed, EtEC®™©. And some skeptics asked how exactly would the mechanism of supply and demand be able to do this? Again the Market Fundamentalists made very specific claims to explain how the mechanism of supply and demand setting prices would replace third party regulation.
In this explanation there isn't room for waffling about the mechanism of supply and demand setting prices. It can't be an on again, off again kind of hazy far off long thing if it is the only thing that that is preventing bad behavior by any of the market participants.
You said that "I don't think that a completely unfettered market is the correct answer for everything." The market fundamentalists believe that unfettered markets are the answer to everything. I don't believe that this is what you are, but I do believe that you don't realize that it is is the most ethically run companies that benefit from regulation the most.
You said that supply and demand setting prices is a feedback mechanism. You are correct. But as such it means two things. One, that it must have a deviation from the norm before it can start to apply corrective action. In other words a problem has to exist before any corrective action can start, regulations try to prevent problems from happening.
And two, the feedback mechanism needs some amount of time to correct the deviation and the deviation, the problem, is going to exist for however long it is going to take to correct. If someone can figure out how long it is going to take and is in the position that they can force a deviation then they can make a whole lot of money in the months or even years that it takes for the feedback mechanism to correct it. And it is the nature of capitalism that if there are profits to be made by some action eventually it will happen.
The events leading up to the 2008 financial crisis are a perfect example of this. The bank and other financial institution executives who committed the mortgage fraud that caused the financial crisis and the Great Recession knew that what they were doing wasn't sustainable, that they were giving mortgages to people who weren't going to be able to make the payments after the teaser period of three years or so was over, that bundling the sub-prime loans with conforming loans didn't wash away the risk and make the resulting mortgage backed securities a safe AAA investment, maybe they even knew that home prices could go down, that their predatory lending scheme would fail because of it, that they would not profit from selling the foreclosed homes but that they would bankrupt the banks because the value of the homes would be much less than the values of the mortgages.
What they did know for certain was that they could make a whole lot of money for themselves in the three years or so until the problems became obvious and market forces corrected.
And they also knew that the government supervisory agencies wouldn't stop them because the agencies were headed by anti-regulation Bush administration appointees who had publicly pledged that they would cut the red tape and not stand in the way of innovation in the mortgage market. And of course as we have all learned with much regret, the Bush people meant it.
And because of the nature of the competitive nature of capitalism, banks that wouldn't have thought of going into the predatory mortgage lending business normally were forced into it to match the profits that the less ethical banks were earning.
I am sorry that once again I have rambled on. In my experience most people here are only interested in proving that they are right and in proving it by making one sentence responses, ignoring anything that they can't respond to without proving that they are wrong. Your explanations of what and why you believe something and your refreshing admissions of what is true of all of us, that there is a limit to your understanding of these things, is what encouraged me to do the same.