Imagine that a generic drug becomes available for the treatment of a condition, no substitute good is available (inslulin might be a good example), and the elasticity of demand is low .Say that there are multiple companies producing this drug and competing with each other for customers.
Assuming no real differences in quality, competition should surely bring the price down to the level at which profits are around zero. So why do Austrians talk of prices being purely about preferences? Obviously a commodity won't sell if it isn't wanted, but that is just stating the obvious. What insight does this statement provide?
"Obviously a commodity won't sell if it isn't wanted, but that is just stating the obvious. What insight does this statement provide?"
A few insights that follow from the subjective theory of value:
1. There is no "real price" or "objective price" for something. The price is whatever two people agree on in an individual transaction.
2. When there is a nuclear explosion, and those who hold iodine pills want 100 times the usual price for it, they are not "price gouging". Charging more is not immoral even in that case, [and indeed has many benefits].
3. The govt should never set wage and price controls. Since they impose restrictions on what the price would be otherwise, they do the economy harm.
4. Workers are not exploited, as Marx claimed, when they get paid in such a way that their employer makes a profit. Like every other commodity, the correct price of their labor is what they agree to take.
5. Minimum wage laws should never be imposed. They forbid people getting paid what they are worth [if they would agree to work for less than minimum wage], which will do great harm.
6. Reccessions are not caused by lack of aggregate demand. See the Rothbard book linked in an earlier post.
7. Gold is more expensive than bread, and movie stars get paid more than great teachers. This can only be epxlained by subjective theory of value.
8. Workers in China are not paid less because they are slaves.
9. If the recession makes it impossible to make a living wage, the fault is not with the free market.
10. No one has a right to healthcare, or a living wage.
11. Employers should be allowed to hire whomever they please, stores to refuse entry and service to whomever they please, landlords to rent to whomever they please, even if they have evil motives such as racism or sexism or agism or whateverism.
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Consumariat:I already have stated that I agree a product will only sell if it is desired by consumers.
I saw but your going in circles and you never bothered to answer my question.
filc:What if no one wanted the drug? Would it matter how many units you produced or how much competition there was if no one wanted the drug? Under those conditions what do you think would happen to the price to influence demand?
Let me ask the same question again but use your hypothetical drug company example.
Lets say the drugs are packaged and sold in 50 dollar bottles. Currently demand has dwindled. Does this mean conclusively that consumers are not interested in the drug? Not necessarily it would be a non-sequitur to assume so. All we can conclude is that consumers value their $50 more then the drugs at this point. Or in other words people are not willing to spend $50 on a bottle of the drug. If on the other hand the drugs were sold at $5 dollars a bottle than consumer demand may skyrocket.
As a result demand is not a black and white scenario, it is neither on nor off. It is never the case where there is demand, or not demand at all. It is not binary. There are degree's of demand and those degrees are decided by the opportunity costs as considered by individual persons and their preferences.
If the drug companies cannot sell their bottle of drugs at $50 a bottle they will be forced to lower the price. An entrepreneur always guess's at how much he thinks he can vend his good for(He is anticipating consumer preference, that is the very roll of an entrepreneur). He knows how much it costs to make and he knows how much to sell each unit to break even. What he doesn't know is how much the consumer will pay for his good. Only the consumer can know how much the good is worth to him. Objects are only worth as much as people are willing to pay, ever heard that before? That price is weighed against other opportunities for the consumer. The consumer decides for himself if the satisfaction rendered justifies the price or if that money can be used elsewhere to get satisfaction. If the entrepreneur cannot attract the consumer at a certain price he must lower it. Consumers alone are the judge as to whether or not the price given is acceptable. The costs that go into producing the good are irrelevent to the consumer.
If an entrepreneur finds that consumers are only willing to buy the drugs at $20 a bottle but it costs him $30 a bottle to produce then all that we can conclude is that his product is considered a waste of resources by most consumers. Consumers conclude that the costs that go into producing the good outweigh the benefits.
You have to remember that these decisions occur on an individual basis. It may be that some consumers are willing to pay $50 a bottle, while others are not. Some are willing to pay $700 for an IPAD2 where others are only willing to spend $300 on an Android Galaxy. So these degrees change based on the individual preferences of each person. Markets and sub-markets are born all with a goal of appeasing a certain consumer. Some goods are priced high with the specific goal of being expensive to attract a haughty crowd. It is all done at the appeal of consumer preference.
Consumariat:This does not imply that those same desires set what the specific price of a good will be.
Indeed it does. If the price is set wrong individual preferences may find other ways to spend their dollar. The consumer's preference shapes and influences the direction of prices. If the majority of consumers do not wish to pay $50 a bottle for the drug, well then the drug companies will be forced to lower their price. Otherwise they will forever sit on an inventory making them no money.
The image below explains the process.
Consumariat:. Who on earth would claim that an unwanted commodity was worth anything? The issue here is about the price level.
I was perhaps too vague in my statement. I was hoping you would have answered the questions I asked you. It's not that there isn't a demand, its that there is no demand for the price given. It all comes down to a price. Who would be willing to buy a ford taurus for 200 grand? Perhaps no one but who would be willing to buy it for 200 bucks? Lots of folk. People decide for themselves if the costs that go into acquiring that good are worth it or not. If not the price must fall.
Consumers are ultimately the end arbiter for prices. If you deny this you deny the foundational tenant of profit and loss.
Everything I stated here is WHY I asked the following questions which you ignored. You should consider answering these questions as they hold the answer to your own.
Filc:why is there a demand?
Filc:Where did the demand come from?
Filc:What if no one wanted the drug? Would it matter how many units you produced or how much competition there was if no one wanted the drug? Under those conditions what do you think would happen to the price to influence demand
Smiling Dave: 1. There is no "real price" or "objective price" for something. The price is whatever two people agree on in an individual transaction.
To add to Dave's point. Prices are historical data. There is no wrong or right price. The right price for one person that would render a succesfull sale might be the wrong price for someone else. Prices are just simply historical data of succesfull exchanges recorded in time. Entrepreneur's can use this historical data to forcast a price that is most likely to vend a good into the future. But there is no "objective" price(I don't even understand what you mean by it). There is no static exchange ratio for goods and services.
There is no correct or incorrect price for corn. The rightness or wrongnes of it is only useful in so far as it becomes a factor in individual exchange. In other words there exists A price for corn that may attract certain indivudals into exchange while THAT same price might deter others. For each succesfull exchange the price used wil be recorded as historical data. The task of the entrepreneur is to find a rate that will maximize the opportunity for exchange. If he wants to vend his good it's up to the scrutanity of the individual consumers to decide whether or not the rate given seemed appropriate to them.
Also I see no use in considering an "average" price as far as this conversation is concerned. The concept is useless as far as understanding markets are concerned.
I think you are also having a problem with how subjective valuations from many individuals becomes an objective price. I would recommend reading Bob Murphy's book Lessons For The Young Economist:
http://mises.org/resources/5706/Lessons-for-the-Young-Economist
Consumariat:The problem I have with the Rothbard quote you gave is that he appears to be equivocating on the word 'value'.
Indeed, when the words price and value are used interchangably it does lead to some confusion. But if you substitute in the word price, the logic is still exactly the same. If people stopped wanting cigars, the price of the cigar machine would drop to 0 (or at least just to the price of the melted down steel). It is not the price of the cigar machine which determines how much cigars are.
Consumariat:... and the lower limit would be production cost.
The lower limit is generally more sensitive to demand for cash than to avoid a loss, in my opinion.
Who would object to the statement "people buy things because they want/need them"?
Lots of people; because it's easy enough to rationalize the cognitive dissonance by setting up a 'secret' preference set in contrast to the manifested one. It's nonsense, but that never stopped anyone from believing it.
OK, I apologise for making this post short. I often find in threads like this, that once more than a certain number of people get involved it becomes difficult to answer everyones reponses, thread fatigue sets in and I often abandon the conversation.
I don't want to abandon another thread, and for that reason I will make one point which I believe sums up the position of mine that seems to be the root of out disagreements. If anyone specifically needs me to respond to their previous questions then let me know and I will attempt to do so, but hopefully this post will make things clearer (either in where I am misunderstanding yourselves, or where you are misunderstanding me)
What I believe to be the issue of conflict is this; I maintain that price determines the amount of demanders - at any given price there will be a certain amount of people demanding that good (nothing controversial so far). But it appears to me that Austrians are saying that the amount of demanders determines the price. This is absurd. It's like saying that because the score of a football game determines who the winner is, we can find out the score of a game simply at looking at who won.
market prices are formed by bargaining between marginal pairs of buyers and sellers. It seems that you are disputing the insight that subjective value for economic goods motivates activity in the market and is the most fundamental force.... Production processes come to carry costs only because other entrepreneurs would bid away your capital goods to fulfill what they expect are their customers needs, and so to overcome this competition of theirs for the capital goods (if you will!) you must bid more than they would. The cost prices (capital goods prices) are emergent due to subjective valuations of buyers and sellers. Both blades of supply and demand as you conceive them are formed by the more fundamental phenomena of subjective value....
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
I maintain that price determines the amount of demanders - at any given price there will be a certain amount of people demanding that good (nothing controversial so far)
Here you set up a thought experiment with an exogenous variable (price) and allow the endogenous variable (demand) to vary as you adjust the former.
but you could have easily set up the exactli inverse experiment......
Perhaps it would help to think of prices as dynamic, changing things. There is the first price a seller sets - he determines it arbitrarily. If there is much demand (more than production), the product will soon become scarce and expensive. So, you see, because of great demand the prices rose.
Now because there was a great demand, other sellers will enter the market and sell the product cheaper and cheaper.
Consumariat:I maintain that price determines the amount of demanders - at any given price there will be a certain amount of people demanding that good (nothing controversial so far). But it appears to me that Austrians are saying that the amount of demanders determines the price.
So it's impossible for you to imagine why a producer would lower his price in order to attract more of this "demand"? Because such a situation would provide an example where the volume of demanders influenced the price? We would have to ignore the fact that this occurs every day as a normal/standard practice on the market in bargaining, exchange, and negotiating the consumers interests over various products?
It's only obsured if you ignore reality I guess. Clicky the linky!
market prices are formed by bargaining between marginal pairs of buyers and sellers.
True
It seems that you are disputing the insight that subjective value for economic goods motivates activity in the market
No not at all. subjective value does indeed 'motivate activity', but such an ambiguous term could mean all sort of things.
and is the most fundamental force....
Subjective valuation is a nessesary condition for a good to be bought to market. I would not say it is the only condition, and I do not know which of the conditions are most fundamental
Production processes come to carry costs only because other entrepreneurs would bid away your capital goods to fulfill what they expect are their customers needs, and so to overcome this competition of theirs for the capital goods (if you will!) you must bid more than they would.
I'm not comfortable with the metaphorical language of 'bidding'. I would go with your initial definition - "production processes come to cary costs (prices) because of bargaining between marginal pairs of buyers and sellers of capital goods"
The cost prices (capital goods prices) are emergent due to subjective valuations of buyers and sellers. Both blades of supply and demand as you conceive them are formed by the more fundamental phenomena of subjective value....
So you claim. But I did not get anything from your post that proved this claim to me. All that I get from your post is a shifting of the question back to the arena of capital goods rather than consumer goods. But we just enter an infinate regress.
Is the Austrian theory of prices just an arbitrary assertion to overcome this infinite regress? That's what it looks like to me.
Consumariat:Subjective valuation is a nessesary condition for a good to be bought to market. I would not say it is the only condition, and I do not know which of the conditions are most fundamental
What is more fundamental then subjective prefernece of the consumer? Can you provide an example of another factor that might be more fundamental? In which situation could you imagine where the subjective valuation was not to buy but other factors caused a consumer to buy anyway? Without losing our grounding in logic there is no case where that would occur.
I would again, recommend reading Lessons For Young Economists, which I linked to previously. He covers a basic example of 4 people, and how their subjective preferences combine to get an objective price on the marketplace.
Sorry, I am having trouble understanding what you arent understanding.... Why do prices exist for any goods at all? If you accept that coal has a price because this guy thinks he might want it to heat his house and that guy thinks he might want it to make steel with then you understand that the 'príce-cost' of a capital good has emerged because of subjective valuations of buyers and sellers. What else is there to say?
Recognise, this analysis is a huge improvement (by virtue of being true!) over failed approaches such as labour theory of value... The coal does not command a price simply because it has stored up labour in it... with stored up labour being somekind of bizarro world objective cost...
Divers dive for pearls because pearls are valued, and people pay divers to overcome the divers opportunity costs( they could have dont other work). It is not the case that pearls are valued because people dive for them ....
This is exactly the doctrine of Dr. [Archbishop Richard] Whately, when he says that people dive for pearls because they fetch a high price, and they do not fetch a high price because people dive for them … that it is not labour that is the cause of value, but value that attracts labour.