Hello, I have a basic demand and supply question.
Suppose you impose a tax on the sales of everything (pizzas, plumbing services, etc). Textbook theory tells us the following:
in particular, standard analysis allows for the possibility that supply decreases and demand stays the same. but shouldn't this be impossible, since for say's law demand is supply? (what you offer is what you produce) so if supply decreases, shouldn't demand always decrease as well? Thanks for your replies
Let's up the ante and ask how, given Say's Law, there can be a supply curve and a demand curve in any situation, for isn't demand always equal to supply? So shouldn't there be only one curve always?
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
1. Supply curves are always talking about a future situation, meaning something that has not happened yet, but presumably happen tomorrow. After all, if on January first the Ford Motor Company has 30,000 cars created and for sale, and the price of cars drops for some reason, or people don't want to pay for the cars a price that will cover the costs of production, those 30,000 cars will not slide down a supply curve into a black hole and disappear. What will happen is that in the future the company wil make less cars.
Say's Law, on the other hand, talks about the present. Given that everyone has made their products, can it be that there will be a general glut, with people unable to pay for all the stuff made? Say answers that no, there will not be such a problem because people will just trade one thing for another [with prices changing if needed to allow for the trades to happen].
So what will happen, according to Say, if the supply of everything goes down? First of all, since things are scarce, their price will go up, since there are the same amount of bidders for a lesser quantity of product. That being the case, the supplier will get more money for the lesser amount of goods, meaning his purchasing power per unit of good that he made has gone up. So the demand [=ability to buy stuff] created by his product will go up. Again, supply will equal demand in the sense of Say's Law.
What will this look like on a suply curve? That the intersection of the supply and demand curves happen at a higher price.
Just a side point:
since supply has decreased and demand stays the same, prices will increase and the number of sales will drop, according to the slopes (elasticities).
At the risk of sounding foolish, is it not obvious without a supply and demand analysis that sales will drop? After all, if I make less today than yesterday, I have less to sell, so of course sales will drop.
Smiling Dave:Let's up the ante and ask how, given Say's Law, there can be a supply curve and a demand curve in any situation, for isn't demand always equal to supply? So shouldn't there be only one curve always?
I think Smiling Dave just solved economics.
If I had a cake and ate it, it can be concluded that I do not have it anymore. HHH
This tax is equivalent to increasing the cost of production of everything.
It reduces the rate of return on everything across the board, thus having no effect whatsoever (unless it makes the rate of return negative). If you just put a tax on pizza's, for example, it would reduce the ror for pizza production, shifting capital towards other, more profitable industries. It would also likely lead to a reduction in wage-rates across the board.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."