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Supply and Demand in the Austrian School

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ViennaSausage Posted: Sat, Jul 12 2008 9:34 PM

How do Austrians view the Law of Supply and Demand?  Under Mainstream Economics, The Law of Supply and Demand determines price and quantity sold on the market.  However, in Austrian Economics, Marginal Utility and Subjective Theory of Value appear as the determinate of price (not exactly sure where quantity comes from, I conjecture the entrepreneurs best guess, come to think of it Marginal Utility STV plays a role from the entrepreneurs point of view.)  Do Austrians utilize the Law of Supply and Demand, or is there no such law in the Austrian School?  

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I hope you don't mind link responses.  This article gives some Austrian views on Supply and Demand theory.  Nothing  beats the textbooks or popularizations in understanding Austrian theory, though.

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cheimison:
I hope you don't mind link responses.

As long as its pertinent info, anything is fair game in my book.  Thanks for the link.

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Insightful read, and answered my question.  Thx.

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ViennaSausage:

Insightful read, and answered my question.  Thx.

No problem.  A message board where information is actually valued, and people take learning as a responsibility for themselves, is a personal relief.  Glad to help.

 

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krazy kaju replied on Sun, Jul 13 2008 11:18 AM

Marginal utility and supply and demand are the same thing. Supply and demand curves just show the entire picture, whereas marginal utility explains the phenomenon on the individual scale.

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krazy kaju:

Marginal utility and supply and demand are the same thing. Supply and demand curves just show the entire picture, whereas marginal utility explains the phenomenon on the individual scale.

For clarification, the definition and explanation of supply and demand are different for the Austrians vs. Neoclassicals?

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I don't think so. The neoclassical school is also based on the writings of marginalists like Carl Menger. The main difference between the neoclassical and the Austrian school is methodology, AFAIK.

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There's a difference in how the Austrians and neoclassicals treat valuation, and this is important to understand, as the Austrians do not acknowledge the validity of concepts such as giffen goods. So whilst superficially similar, the Austrian notion of marginal utility and valuation differs from the neoclassical one.

-Jon

Freedom of markets is positively correlated with the degree of evolution in any society...

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Jon Irenicus:

There's a difference in how the Austrians and neoclassicals treat valuation, and this is important to understand, as the Austrians do not acknowledge the validity of concepts such as giffen goods. So whilst superficially similar, the Austrian notion of marginal utility and valuation differs from the neoclassical one.

 

To Austrians, there are only two types of good, capital goods and consumer goods?  The value of all goods is subjective, so while a good may be a "giffen good", it is delineated as a consumer good for the consumer based on his subjective value of the good.

 

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krazy kaju:
The neoclassical school is also based on the writings of marginalists like Carl Menger.

Correct, but I think the neoclassical take on Marginal Utility was cardinal whereas the Austrians were ordinal.

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Jon Irenicus:

There's a difference in how the Austrians and neoclassicals treat valuation, and this is important to understand, as the Austrians do not acknowledge the validity of concepts such as giffen goods. So whilst superficially similar, the Austrian notion of marginal utility and valuation differs from the neoclassical one.

I very much doubt the validaty of this statement. Possibly there some very sublte details that nobody cares about like the orthogonal and cardinal thing... This is very basic stuff however, that comes from Carl Menger and is not disputable. With regard to giffen goods, there have been actual psycological experiments on this, it's just price elasticity. Imagine that you usually buy 10 pieces of bread at $10 and 5 croissants at $20 (1x4). The price of bread doubles, so you may cut in the superficial good used for the same purpose, and buy instead the bread now 15 pieces at $30 (1x2).

Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. -- F. A. Hayek in The Constitution of Liberty

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krazy kaju replied on Mon, Jul 14 2008 10:06 AM

WTH, I'm confused.

Does anybody know any good books to read about the neoclassical school?

I know that both Austrian and neoclassical economics grew out of the marginalist revolution, but I really don't know any differences besides capital theory and methodology.

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It's still not an exception to the law of demand, as the neoclassicals think it is. To illustrate what I mean:

I think Matt is on the right track here.  The concept of a Giffen good
makes sense only within the neoclassical framework of partial  equilibrium
analysis.  An unexplained change in the price of a given good is posited in
what is essentially a barter economy and an answer is sought to the
question of what the effect would be on the quantity demanded of the good,
ceteris paribus.   In Mengerian causal-realist analysis both the analytical
framework and the question asked are radically different.  Price changes
are seen as the outcome of the deeper causal forces of value scales and
existing stocks of the various goods and of money and of the (anticipated)
purchasing power of the latter.  At a given moment in time, the structure
of prices and the purchasing power of money are determined by the
interaction of all market agents' individual value rankings of the
currently existing supplies of goods and money balances (taking into
account speculative anticipations of changes in prices).  The question is
then posed:  What would happen if the supply of a single good were to
change, say increase, ceteris paribus?  Since the causal-realist economist
is interested in isolating the complete adjustment process of an individual
change, the ceteris paribus qualification is construed as precluding any
other AUTONOMOUS change in the economic data until full adjustment of the
overall economy has been made to the change in supply of the good in
question.  Assuming that the good is well short of the margin of full
satiation of at least some consumers' wants, the additional units must
cause a decrease in marginal utilities of the good and result in a fall in
its price and an attendant increase in its quantity demanded on the market.
This is true always and everywhere and for all goods.  Giffen goods, in the
Marshallian-neoclassical sense, play no role in Mengerian causal-realist
analysis, because the focus of analysis is always on the   underlying
factors determining real money prices.  Analyzing an uncaused change in the
price of a good--what neoclassicals call in another context an "individual
experiment"--is mental gymnastics and analytically meaningless.

None of this is meant to deny that the series of endogenous changes in the
demand curves and prices of  related goods (substitutes and complements),
in the purchasing power of money and in the distribution of wealth induced
by this change in supply of a given good may cause some low-income people
as well as others to purchase less of the good at the lower price than they
did at the higher price in the new final equilibrium.  But this is hardly
evidence that demand curves can ever be upward sloping. Rather it is an
illustration of the fact that all prices are interconnected and that every
single change in the fundamental economic data brings about a "revolution"
in the structure of demands, incomes and prices.

For a causal realist analysis of demand curves, I recommend the relevant
chapters of Wicksteed's Common Sense of Political Economy; Arthur Marget's
Theory of Prices; and Rothbard's Man, Economy and State, esp. pp. 280-288
(Scholars Ed.)

So there are differences, however subtle and hidden, that lead economists from the two schools to divergent conclusions.

And no, neoclassicals do not believe utility is cardinal, they're not that stupid (although some are.)

-Jon

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Fernando replied on Thu, Mar 29 2012 1:21 PM

The Law of suplly and demanda is a praxeological law?
 

How can we locally deduce the fact that when the demanda increase, the price will increase,  ceteris paribus? Is this really deductible from the action axiom? How? Anyone knows how to demonstrate it?

If an artist charge $1000 for his show, and the demand increases, and he keep the price, does it refute the law?

 

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Wheylous replied on Thu, Mar 29 2012 3:31 PM

http://mises.org/daily/5014

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