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The Austrians, Demand and the Long Run

Reasoning
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2/2/2011 4:05:59 PM
Posted: 5 years ago
Suppose we are in an initial long-run equilibrium where the price of cigars is $5.

Suddenly there is a huge increase in demand for cigars and the price rises to $8. This means that for each cigar sold, the cigar manufacturers make $3 more than normal profit on each cigar.

But this just means that more factors of production will move into the field of cigar production, this increase in supply of cigars will bring the price of cigars back to the cost of production, $5.

In other words, in the long-run, demand appears to make no difference at all.

Where did I go wrong in my analysis?
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
Reasoning
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2/2/2011 4:12:09 PM
Posted: 5 years ago
At 2/2/2011 4:09:57 PM, belle wrote:
clearly it makes a difference in how many cigars are produced.

True. I suppose I was being a bit sloppy. But it doesn't make a difference in the price at which the cigar is sold.
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
askbob
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2/2/2011 4:14:06 PM
Posted: 5 years ago
A clear lack of understanding of the supply and demand curve.

When there is more demand the demand curve shifts to the right. In the long term the supply curve does not inherently shift to the right it stays the same. While more quantity is being produced as a result of the higher demand, the cost of production isn't inherently going to become cheaper meaning the price will stay at a heightened rate until advances in technology, cheaper labor, or economies of scale shift the supply curve to the right or the demand lessens to its previous rate causing the demand curve to be shifted back to the left in its original position.
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darkkermit
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2/2/2011 4:14:19 PM
Posted: 5 years ago
At 2/2/2011 4:12:09 PM, Reasoning wrote:
At 2/2/2011 4:09:57 PM, belle wrote:
clearly it makes a difference in how many cigars are produced.

True. I suppose I was being a bit sloppy. But it doesn't make a difference in the price at which the cigar is sold.

You have more workers, natural resources that flow into making cigars. Workers might need to be paid more, in order to satisfy the increase in workers, as well as natural resources will cost more, due to its depletion.
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askbob
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2/2/2011 4:14:43 PM
Posted: 5 years ago
At 2/2/2011 4:12:09 PM, Reasoning wrote:
At 2/2/2011 4:09:57 PM, belle wrote:
clearly it makes a difference in how many cigars are produced.

True. I suppose I was being a bit sloppy. But it doesn't make a difference in the price at which the cigar is sold.

It does make a difference, your reasoning is faulty.
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askbob
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2/2/2011 4:16:03 PM
Posted: 5 years ago
TL;DR

There is a fundamental difference between shifting the demand curve, and moving along the supply curve.
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Reasoning
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2/2/2011 4:17:40 PM
Posted: 5 years ago
At 2/2/2011 4:14:06 PM, askbob wrote:
While more quantity is being produced as a result of the higher demand, the cost of production isn't inherently going to become cheaper

I never said it would. In fact, I assumed it would remain the same. That is $5. Or, rather, $5 minus the interest rate over the period of production.
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Reasoning
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2/2/2011 4:20:00 PM
Posted: 5 years ago
At 2/2/2011 4:14:19 PM, darkkermit wrote:
You have more workers, natural resources that flow into making cigars. Workers might need to be paid more, in order to satisfy the increase in workers, as well as natural resources will cost more, due to its depletion.

I was more referring to the impact that demand has on the long-run price of the cigar.
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
askbob
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2/2/2011 4:20:22 PM
Posted: 5 years ago
At 2/2/2011 4:17:40 PM, Reasoning wrote:
At 2/2/2011 4:14:06 PM, askbob wrote:
While more quantity is being produced as a result of the higher demand, the cost of production isn't inherently going to become cheaper

I never said it would. In fact, I assumed it would remain the same. That is $5. Or, rather, $5 minus the interest rate over the period of production.

When you argued that the price would remain the over the long term you made that inference.
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Reasoning
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2/2/2011 4:21:07 PM
Posted: 5 years ago
At 2/2/2011 4:20:22 PM, askbob wrote:
When you argued that the price would remain the over the long term you made that inference.

Come again?
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askbob
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2/2/2011 4:27:32 PM
Posted: 5 years ago
At 2/2/2011 4:21:07 PM, Reasoning wrote:
At 2/2/2011 4:20:22 PM, askbob wrote:
When you argued that the price would remain the over the long term you made that inference.

Come again?

You are making the assumption that the supply curve shifts as a reaction to a demand curve shifting. This is not so.

Maybe in a perfectly competitive market where all production resources cost the same. However such an industry does not exist nor do the resources.

There is a limited number of farmland, workers, resources, etc. As you consume more the price exponentially increases.
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Reasoning
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2/2/2011 4:32:27 PM
Posted: 5 years ago
"It is, therefore, strictly correct to say, that the value of things which can be increased in quantity at pleasure, does not depend (except accidentally, and during the time necessary for production to adjust itself), upon demand and supply; on the contrary, demand and supply depend upon it. There is a demand for a certain quantity of the
commodity at its natural or cost value, and to that the supply in the long run endeavours to conform." - John Stuart Mill
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
askbob
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2/2/2011 4:41:42 PM
Posted: 5 years ago
I don't give a shitt about nonsensical quotes. Use logic.
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Reasoning
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2/2/2011 4:43:22 PM
Posted: 5 years ago
At 2/2/2011 4:27:32 PM, askbob wrote:
You are making the assumption that the supply curve shifts as a reaction to a demand curve shifting. This is not so.

If you insist on using your graphs, fine.

I'm not saying that the supply curve shifts, I'm saying that the supply curve is horizontal or perfectly elastic. It does not shift.
"What we really ought to ask the liberal, before we even begin addressing his agenda, is this: In what kind of society would he be a conservative?" - Joseph Sobran
askbob
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2/2/2011 4:45:02 PM
Posted: 5 years ago
Furthermore your quote says that supply will adjust to meet demand. I agree with this. I just don't agree that the supply curve will be shifted to match the demand shift.
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askbob
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2/2/2011 4:47:50 PM
Posted: 5 years ago
At 2/2/2011 4:43:22 PM, Reasoning wrote:
At 2/2/2011 4:27:32 PM, askbob wrote:
You are making the assumption that the supply curve shifts as a reaction to a demand curve shifting. This is not so.

If you insist on using your graphs, fine.

I'm not saying that the supply curve shifts, I'm saying that the supply curve is horizontal or perfectly elastic. It does not shift.

LOL well then you're ignoring the obvious supply and demand curves of factors of production.
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Reasoning
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2/2/2011 4:51:07 PM
Posted: 5 years ago
At 2/2/2011 4:47:50 PM, askbob wrote:
LOL well then you're ignoring the obvious supply and demand curves of factors of production.

Do you deny that in long-run equilibrium there is an equalization of profit across the fields of production?
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askbob
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2/2/2011 4:57:55 PM
Posted: 5 years ago
At 2/2/2011 4:51:07 PM, Reasoning wrote:
At 2/2/2011 4:47:50 PM, askbob wrote:
LOL well then you're ignoring the obvious supply and demand curves of factors of production.

Do you deny that in long-run equilibrium there is an equalization of profit across the fields of production?

THE AMOUNT OF FIRMS COMPETING IN AN INDUSTRY HAS ABSOLUTELY SHITT TO DO WITH THE REAL PRICE OF A GOOD

nac

It has to do with the price given to the consumer and the amount of profit made off of the real price.

Consumer Price = Real Price + Profit

The amount of firms within the industry affect the consumer price and the profit. They have little impact on the real price with the exception of one inventing a more efficient means of production but that's largely besides the point and is ceterius paribus.

The Real price is a product of the demand and supply of the product being produced.

Two different issues.
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Reasoning
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2/2/2011 10:46:45 PM
Posted: 5 years ago
At 2/2/2011 4:57:55 PM, askbob wrote:
At 2/2/2011 4:51:07 PM, Reasoning wrote:
At 2/2/2011 4:47:50 PM, askbob wrote:
LOL well then you're ignoring the obvious supply and demand curves of factors of production.

Do you deny that in long-run equilibrium there is an equalization of profit across the fields of production?

THE AMOUNT OF FIRMS COMPETING IN AN INDUSTRY HAS ABSOLUTELY SHITT TO DO WITH THE REAL PRICE OF A GOOD

I'm to sure what that has to do with this example.

It has to do with the price given to the consumer and the amount of profit made off of the real price.

We're in long-run equilibrium.

Consumer Price = Real Price + Profit

I haven't heard that before and I'm not sure what it means.

The Real price is a product of the demand and supply of the product being produced.

My argument is that demand and supply are determined by cost of production.
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mongeese
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2/2/2011 11:02:02 PM
Posted: 5 years ago
The price will drop, but not necessarily to the original $5.

Land that was previously not used for cigars will now be used for cigars; this land is probably less optimal for the production of cigars. Additionally, they will have start-up costs that have to be met through the sale of cigars. The price will be slightly above $5.

As for the supply and demand curves, as the demand curve has shifted, the equilibrium point has changed, and more cigars will be supplied to meet an increased demand.
lewis20
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2/2/2011 11:30:22 PM
Posted: 5 years ago
At 2/2/2011 4:05:59 PM, Reasoning wrote:
Suppose we are in an initial long-run equilibrium where the price of cigars is $5.

Suddenly there is a huge increase in demand for cigars and the price rises to $8. This means that for each cigar sold, the cigar manufacturers make $3 more than normal profit on each cigar.

But this just means that more factors of production will move into the field of cigar production, this increase in supply of cigars will bring the price of cigars back to the cost of production, $5.

The factors of production will cost more and raise the cost of producing cigars. So the price will stay at 8.

In other words, in the long-run, demand appears to make no difference at all.

Where did I go wrong in my analysis?
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lewis20
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2/2/2011 11:35:03 PM
Posted: 5 years ago
Your argument assumes they can simply produce more at no extra cost to them, if that were the case they weren't producing at the margin in the first place.
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lewis20
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2/2/2011 11:47:21 PM
Posted: 5 years ago
At 2/2/2011 4:43:22 PM, Reasoning wrote:
At 2/2/2011 4:27:32 PM, askbob wrote:
You are making the assumption that the supply curve shifts as a reaction to a demand curve shifting. This is not so.

If you insist on using your graphs, fine.

I'm not saying that the supply curve shifts, I'm saying that the supply curve is horizontal or perfectly elastic. It does not shift.

If the supply of cigars is perfectly elastic a change in the demand curve wouldn't change the price. But the supply of cigars isn't perfectly elastic.
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Reasoning
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2/3/2011 12:23:02 AM
Posted: 5 years ago
At 2/2/2011 11:02:02 PM, mongeese wrote:
The price will drop, but not necessarily to the original $5.

Land that was previously not used for cigars will now be used for cigars; this land is probably less optimal for the production of cigars. Additionally, they will have start-up costs that have to be met through the sale of cigars. The price will be slightly above $5.

As for the supply and demand curves, as the demand curve has shifted, the equilibrium point has changed, and more cigars will be supplied to meet an increased demand.

Ah, yes, that makes sense.
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TheAtheistAllegiance
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2/3/2011 4:11:08 PM
Posted: 5 years ago
Askbob and Mongeese did a good job pointing out the issues. All land, labor, capital, and entrepreneurship is scarce, so prices would rise exponentially due to this limited supply. Plus, there's barriers to entry and niches, which will also limit the ability of supply to coordinate with demand at a price of $5. So, the price would inevitably rise...
Sieben
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2/3/2011 4:27:03 PM
Posted: 5 years ago
At 2/3/2011 4:11:08 PM, TheAtheistAllegiance wrote:
All land, labor, capital, and entrepreneurship is scarce, so prices would rise exponentially due to this limited supply.
Are you kidding? They're all SCARCE but the supply isn't limited to a fixed amount. Even stuff like land, which is just kind of naturally there, isn't valuable in itself. The uses for land/labor/capital all can be improved so you can do more with less.

Plus, there's barriers to entry and niches, which will also limit the ability of supply to coordinate with demand at a price of $5.
So that's why its a long run prediction. Maybe someone wouldn't front up the cost of entering the market at the current discount rate/risk. It just means people go and put other resources to more economic uses. Problem?

So, the price would inevitably rise...
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Reasoning
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2/3/2011 9:48:30 PM
Posted: 5 years ago
At 2/3/2011 4:27:03 PM, Sieben wrote:
So, the price would inevitably rise...
http://www.vtunali.com...

To be fair, we were assuming there were no changes in technology that would make cigar production more efficient.
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Sieben
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2/3/2011 10:03:10 PM
Posted: 5 years ago
At 2/3/2011 9:48:30 PM, Reasoning wrote:
At 2/3/2011 4:27:03 PM, Sieben wrote:
So, the price would inevitably rise...
http://www.vtunali.com...

To be fair, we were assuming there were no changes in technology that would make cigar production more efficient.

Ya I don't see an equilibrium price on that graph.
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darkkermit
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2/4/2011 12:41:21 PM
Posted: 5 years ago
At 2/3/2011 10:03:10 PM, Sieben wrote:
At 2/3/2011 9:48:30 PM, Reasoning wrote:
At 2/3/2011 4:27:03 PM, Sieben wrote:
So, the price would inevitably rise...
http://www.vtunali.com...

To be fair, we were assuming there were no changes in technology that would make cigar production more efficient.

Ya I don't see an equilibrium price on that graph.

equilibrium price assumes ceteris paribus. It's theoretical, however it does not occur in the real world for a long time, since the world is constantly changing.
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