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Rothbard quote on 'elastic demand downward'...

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jimaustri123 Posted: Fri, Sep 28 2012 5:13 AM

Hi,

I was just listening to a Mises Daily Audio entitled 'Is Greater Productivity a Danger?' by David Gordon, who quotes Murray Rothbard:

"A technological improvement in an industry will tend to increase employment in that industry, if the demand for that product is elastic downward so that the greater supply of goods induces greater consumer spending. On the other hand, an innovation in an industry with inelastic demand downward will cause consumers to spend less on the more abundant products, contracting employment in that industry. In short, the process of technological innovation shifts work from the inelastic-demand to the elastic-demand industries. Financial crises may interrupt growth but given the unlimited character of human wants, they cannot permanently supplant it. "

My question is why is he using the word 'downward'? Seems to me that he is describing demand that is elastic upward i.e. in the direction of greater production and consumer purchases/sales.

Maybe I'm missing something. Could someone explain this to me?

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Wheylous replied on Fri, Sep 28 2012 8:07 AM

He might just be stressing the point that demand always slopes down. After all, he says "the process of technological innovation shifts work from the inelastic-demand to the elastic-demand industries.", where he doesn't mention downward, and hence it's not central to the point his making, because we already know demand slopes down.

But there might be come other explanation. I am expecting Esuric or Smiling Dave to reply here :P

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Okay, I'll wait & see if anyone responds. But, in the meantime, what do you mean by 'demand always slopes down'?

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Are you familiar with what a supply and demand graph looks like?

 

Here is my interpretation:

When Rothbard says demand is elastic, it simply means that the demand curve is not vertical (i.e., changes in price will affect quantity demanded).

"...greater supply of goods induces greater consumer spending" - Notice, on the above graph, if supply were to increase (shift to the right), the new equilibrium point (where the two lines intersect) will be at a greater quantity.

So, Rothbard is just talking about the typical supply and demand model, where demand is downward sloping. 

Hope that makes sense.

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It's been a while since I read MES, but I think when Rothbard says that demand is "elastic donwards" he means that demand is elastic below the market price, while elastic upwards would mean that demand for the good is elastic above the market price.

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maybe you just need the definitions...

elasticity of demand  is a measurement of how consumers respond to price changes.  You take the percentage change in quantity demanded and divide by the percentage change in price.  That tells you how elastic or inelastic a product is.

an elastic demand occurs when consumers are very responsive to price changes.  when the change of quantity demanded exceeds the change in price.

So a small change in price can get you A LOT more customers.

"seems to me that he is describing demand that is elastic upward i.e. in the direction of greater production and consumer purchases/sales"

Not really sure what you are thinking here.  Sounds like you might be combine the law of supple and the law of demand together.  Demand just shows how many people will buy and at what price (whether there is a supply of it at that price or not).

 

****edit: like to add that the demand curve is always downward.

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Wheylous replied on Sat, Sep 29 2012 2:22 PM

I think when Rothbard says that demand is "elastic donwards" he means that demand is elastic below the market price,

As well as upwards, in that case, no?

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"elasticity of demand  is a measurement of how consumers respond to price changes.  You take the percentage change in quantity demanded and divide by the percentage change in price.  That tells you how elastic or inelastic a product is."

 

Okay.  Bear with me, I have no economic training and I'm just coming at this with the logic of a layman.

 

How does one measure quantity demanded?

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Wheylous replied on Sun, Sep 30 2012 11:38 AM

Well, I'm not really sure it can be measured, though I guess that with some assumptions you can say that you can measure quantity demanded by looking at total sales for a good in a year.

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To add to the excellent answers, this is my understanding. Elastic is a very technical term, which he defines in chapter 2, section 6 of MES. If you read that section, you see that elasticity only is defined when you have two prices, and compare how much money the sellers make at each price.

Extrapolating from what he says in that section, I assume that "elastic downward" means the sellers make more money at the lower price [because so many more people buy at the lower price that the total amount of money made is higher], for any two prices you choose to compare.

Elastic upward would mean they make more money at the higher price, for any two prices you choose. This situation can also be called inelastic downward.  

 

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Not sure what book/paper 'MES' is referring to but anyway, to me it seems logical from the comments here so far, that elastic demand means the demand follows a change in productive output and corresponding change in consumer spending[on that product].

In other words, the demand doesn't diminish (is not brittle so as to be left behind) when there is a change - upwards or downwards - in productive output and corresponding spending on that product.

That is just me surmising... so I'll try to paraphrase Gordon:

If a company in any particular industry downsizes, in terms of the number of workers, due to increased efficiency, as long as the industry itself is selling more than it did before(elastic downwards) - the employment number in that industry will go up.

Does that make sense? Or am I just as confused as when I started this thread?
 

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MES= Man, Economy, and State.

MES is available free here in several formats.

You have to read Chapter 2, Section 6 of MES.

The paraphrase of Gordon is this:

Say a technological improvement makes it possible to increase production with the same amount of workers you had before. First of all, by the laws of supply and demand, the price of the product will go down. Increased supply means cheaper prices.

But cheaper prices don't always mean less profits for the industry. Sometimes the cheaper prices draw in so many new buyers that the industry makes more money. And of course sometimes that doesn't happen. The amount of new buyers brought in may not be enough to compensate for the loss of profits caused by the lower price. 

If an industry always makes more money when it increases production because more people will buy their product, [even though by the law of supply and demand they will have to charge a lower price], then of course that industry will increase production [because it wants more money], and thus will have to hire more workers [because increasing production means you need more people working away making the stuff].

[An example might be the early days of the auto industry. When a way was found to make cars at a cheaper price, sales skyrocketed and so did the auto industry's profits and so did the number of people working in the auto plants, even though cars were being sold at a lower price. ].

Similarly, if an industry always makes less money when it increases production because by the law of supply and demand they will have to charge a lower price, [even though more people will buy their product], then of course that industry will decrease production [because it loses money], and thus will have to fire workers [because decreasing production means you need less people working away making the stuff].

[An example might be farming. When technology made it possible to grow more food with less workers, people left the farms and started working doing something else].

In short, the process of technological innovation shifts work from the industries that will make less profit from increased production [the farm] to those that will make more profit [the auto industry]. Financial crises may interrupt growth [when the farm boys are temporarily out of jobs since they are no longer needed]  but given the unlimited character of human wants, they cannot permanently supplant it [because there will always be something that has to be done and the farm workers will get jobs doing that].

 

 

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My question is why is he using the word 'downward'?

My understanding of this is that "downward" specifies range of price where demand must be elastic or inelastic. "Downward" is the relevant range, as with innovations the price is going to decrease. We just do not care about elasticity of demand at higher prices in this case, as we assume decreasing prices.

For inelastic demand (in relevant price range), the demand does not grow enough to compensate for decreasing price, so that the total outlay decreases as well (this is the definition of inelastic demand).

This is covered in MES 2.6, Direct Exchange, Elasticity of Demand.

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