I am an eklektarchist not an anarchist.
Educational Pamphlet Mises Group
Demand elasticity is different for different groups of people, which is how price discrimination comes about. While old people are not willing to pay as much for coffee as active people, they will patronize the stores outside of peak hours, meaning the marginal demand/marginal cost equilibrium will be lower.
You will make more money if you lower prices for old people and it will not cost you anything more.
The fallacies of intellectual communism, a compilation - On the nature of power
I think stranger put it well, but I had a couple thoughts.
Retired persons (or seniors) probably tend to go to McDonalds less that the younger crowd, due to the unhealthy food and a fixed income (retirement plan, social security, etc.)
By offering senior discounts, McDonalds draws in consumers that it would otherwise not have. And you can bet they aren't selling the coffee for less than they pay for it, so they are in effect making less of a profit but getting more sales. And hey, maybe old man winter might want an Egg McMuffin along with it.
It's just a way to boost sales and draw in customers it would otherwise not have.
These discounts apply to Student discounts as well. While the student may pay less for a ticket, he has to pay the same rediculous price for popcorn and a soda. Once you get them in the door, odds are they buy something else that is not discounted.
I'm not sure if this rationalization works across the board, as Taco Bell offers a 15% discount on all products to seniors, and many franchises offer police officers their order for free.
A few thoughts:
There's no such thing as a "loss leader" in any exchange. All exchange, no matter what it is, is only occurring because that which is received is valed more than that which is given away in exchange. All exchange is subjectively profitable at the moment of exchange. It is a very common error, however, to mistake the actual goods being exchanged with some preconceived narrow defintion of a marginal unit of a "notional" supply.
You didn't say the elderly person decided to NOT purchase the nominally higher priced coffee from Burger King. I'm betting he did trade money for the Burger King coffee. This shows there is a wide overlapping range of mutual profit from possible exchanges. Alhtough this person may have profitted more from purchasing McDonald's coffee he nevertheless increased his subjective wealth by trading money for Burger King coffee. (Edit: Actually that last sentence is a mistake. Only if the person actually left Burger King and went to McDonald's to purchase coffee *could* that person have actually further increased his subjective value profit from exchange.)
There are *lots* of possible reasons why trading the same product in the same container for different prices to different individuals "makes sense". Celebrities can often trade their fame to luxury goods providers for "free" luxury item "gifts", yet still profit both parties to the exchange. The luxury goods providers are profiting from the possibility that the masses will want what the celebrities want. So even though they are "nominally" exchanging luxury goods for no money, they are also purchasing, or trading for, advertising buzz. So called promotional "give aways", such as being the one millionth customer, are not in the least exchanges which register economic loss. On the contrary, they are by definition mutually profitable exchanges. The error is the opposite of conflation, innacurate restriction to a preconceived marginal unit of suppy when the actual supply is indeed a conflation of distinctly separate supplies bundled into the mutually profitable exchange.
I'm going to also add in an example on the opposite end of a spectrum, charging a higher price than "normal". Concessions at sporting events commonly charge "high" prices for their concession foods. Nevertheless, when peole actually trade money for that food, they are increasing their subjective value profit by doing that exchange. People may also consume a larger meal before attending an event with, competition restricted or eliminated, food services bundled with entertainment events. People may attempt to smuggle in food and alcohol to these events, even going so far as positively valuing the chance they will avoid detection more than the chance they will be discovered and refused admittance or have their food confiscated, or their tickets revoked. This may make the price of attending extended time period entertainment events higher than the nominal ticket price, and is duly weighed in present and future decisions whether to attend or not attend such events. That means changes in bundled supplies of trade events can increase or decrease the degree of subjective profitability of the exchange even though the main element of the trade, the ticket price, remains nominally the same. This is why in some cases of disaster, such as power going out in a movie showing, it is *more* PROFITABLE for the movie theater to trade ticket price refunds to the consumers rather than to not trade ticket price refunds to the consumers. Every actual present tense exchange is only occurring because that which is received is value MORE than that which is given away in exchange.
In this case it's possible McDonald's wishes to not only trade coffee for money but also trade coffe for money PLUS a senior friendly-family friendly image which pays off in profit in the form of more future customers who will trade higher nominal quanities of money for the same coffee. The possibility of the future pay off has positive economic trade value at the moment of exchange with all seniors who nominally trade 55 cents for a cup of coffee. McDonald's is profiting from every one of these exchanges, even if the cost of the coffee was greater than 55 cents, as long as (and by definition of trade it must be the case) the additional subjective value of the seperate additional "not so easily seen" bundled goods nets positive subjective value profit from the trade exchange.
This is an instance of product differentiation. Mises addresses the phenomenon in Human Action, and provides a number of reasons as to why it is not the same thing as price discrimination.
http://www.mises.org/humanaction/chap16sec10.asp
Inquisitor: This is an instance of product differentiation. Mises addresses the phenomenon in Human Action, and provides a number of reasons as to why it is not the same thing as price discrimination.
I do not see how you are saying that selling the same cup of coffee to a senior for a lower price is product differentiation. Since the two products (coffee sold to a young person and coffee sold to a senior) are the same product, this is true price discrimination. McDonald's knows that they can sell more coffee if they offer a discount to a senior. If they had not offered it at a discount, the seniors would not buy as much coffee since they tend to value their coffee less than younger people on less-strict budgets. McDonald's is not selling the coffee at a loss since the marginal cost is almost nothing on beverages.
Stranger had the response correct when he pointed out the demand elasticity. If you think of a demand curve, you can sell a larger quantity of a good at a lower price. If you can sell to some at a higher price and some at a lower price and are able to prevent arbitrage (most people don't want to buy second-hand coffee), you can make more money.
Edit: Inquisitor, if you were responding to rtr's comment that the senior coffee is a bundled good, then I agree.
jdburdette:I do not see how you are saying that selling the same cup of coffee to a senior for a lower price is product differentiation.
leonidia:Doesn't the mere fact that the price differential cannot be eliminated by arbitrage indicate that there is in fact product differentiation?
I would say that once coffee is sold, it is a different product because no one really wants "secondhand coffee," they want "fresh coffee" because then they know where it came from. Coffee bought from McDonalds at the cash register is the same no matter who buys it (ignoring the fact that sometimes it may be fresher than other times). Coffee bought from different places, however, is a different product. This is why coffee at Starbucks costs more than coffee from a gas station.
All people who buy tickets at a movie theater go to see the same movie, but some pay the "student" price, others pay the "child" price, and others pay the "senior" price. However, seeing a movie at the matinee time is a different product and is priced differently from an evening movie.
Well I had in mind the objection leonidia brought up, but I guess I see your point.
Thanks to all wo responded!
Ryan
ryanpatgray: I was ordering food at a local Burger King today and an elderly gentleman was complaining about the cost of coffee there. “At McDonalds you can get senior coffee for 53 Cents.” he said. He was referring to a phenomenon that I have seen elsewhere, pricing for special groups of people. In this case, McDonalds was willing to sell him the same product in the same container for a lower price due to his age. Sometimes this goes the other direction with “kids tickets” to circuses or “student” pricing at movie theaters if you can show you have a college or university ID. I can see an advantage to lowering prices for young people if you want to get them “hooked” before they reach their peak of buying power. This is one reason Microsoft sells student priced software. But what of McDonald’s “senior coffee?” Is this because they think these people are less likely to buy the product at all? Is this a loss leader for people who generally do not buy fast food? Under what business model does selling the same product in the same container to senior citizens for a lower price make sense? I am not complaining by the way, I am just asking from an economic point of view.
I was ordering food at a local Burger King today and an elderly gentleman was complaining about the cost of coffee there. “At McDonalds you can get senior coffee for 53 Cents.” he said. He was referring to a phenomenon that I have seen elsewhere, pricing for special groups of people. In this case, McDonalds was willing to sell him the same product in the same container for a lower price due to his age. Sometimes this goes the other direction with “kids tickets” to circuses or “student” pricing at movie theaters if you can show you have a college or university ID. I can see an advantage to lowering prices for young people if you want to get them “hooked” before they reach their peak of buying power. This is one reason Microsoft sells student priced software. But what of McDonald’s “senior coffee?” Is this because they think these people are less likely to buy the product at all? Is this a loss leader for people who generally do not buy fast food? Under what business model does selling the same product in the same container to senior citizens for a lower price make sense? I am not complaining by the way, I am just asking from an economic point of view.
Different social groups have different average amounts of income, making the income and substitution effects different for each group, such that the equilibrium price depends on which group you're selling to.
Having a discount for seniors can therefore make more profit, because the lower price is more acceptable to seniors, as they can afford it and don't need to either forego coffee or substitute it for something cheaper.
"Austrian economics and freedom are not synonymous." -JAlanKatz
I think they do it because the public appreciates the appearance of 'helping out the senior citizens.' Almost nobody will think less of them for it, and a good amount of people will think McDonald's is more of a charitable company.
i think rtr is quite wrong in saying there is no such thing as a "loss leader" in any exchange. anybody who has worked in a large and successful business will realize that there are cost accountants who are able to establish the breakeven cost (in a pure accounting sense) of every product, otherwise how could successful/unsuccessful product lines be evaluated. "loss" in this sense is purely an accounting term, nobody denies there may be a marketing/social/pscyhological payoff, but this is a different animal.
Wrong. If what you say were true then those businesses would be *BETTER OFF* not making any one of those trades you call "loss leaders". How are those businesses becoming "large" and "successful" if they are giving away their assets for LESS then what those assets are worth?
"Accounting loss" is purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade.
newson:nobody denies there may be a marketing/social/pscyhological payoff, but this is a different animal.
We are talking about strict *economic* profit from exchange. At the moment of every exchange, someone is either A.) better off from doing the exchange, B.) worse off from doing the exchange, or C.) indifferent from doing the exchange. In the cases of B.) and C.) there's absolutely no reason for the exchange to occur. It doesn't matter if the exchange is a "charitable donation", a fire sale sell off of excess inventory, or "free" product samples. All of that action is only occurring because that which is receieved is valued more than that which is given away in exchange; all action is undertaken with the purpose to go to a state of lesser dissatisfaction from a state of greater dissatisfaction.
The actions undertaken prior to what you arbitrarily call the "breakeven cost" are *only* undertaken because the subjective value of undertaking those actions (for whatever subjective reasons whatsoever) is GREATER than the subjective value of not undertaking those actions at the moments that every one of those actions were undertaken. Just like "credit" has positive economic value, just like promises have positive economic value, just like expectations, beliefs, hopes, dreams have positive economic value to specific acting individuals. Trading for or accumulating investment capital only occurs because the trading for or accumulating of investment capital profits those that are trading for or accumulating investment capital. The particular use or aim of any marginal unit of investment capital is only occurring because that use is subjectively valued more than any other possible use (or NON-USE) of that particular marginal unit of investment capital.
newson:otherwise how could successful/unsuccessful product lines be evaluated.
By the automatic "stop loss orders" of the absence or cessation of trade, or by the continued production and trade of those product lines. "Successful/unsuccessful" product lines are evaluated exactly the same way every trade exchange whatsoever is evaluated, by whether or not it is occurring in the present tense. The only reason any action whatsoever, including trade, is occurring in the present tense is because that which is received is valued more than that which is given away in exchange.
Even if there is an "accounting loss" from lowered market subjective value of some thing, exchange of that same some thing will still *only* occur if exchange of that same some thing is more valuable than not exchanging that same some thing. It doesn't matter what the "supply" is, it doesn't matter what the "demand" is, it doesn't matter what the "price" is, all exchange only occurs because it increases positive economic value. Therefore, there is no such thing as a "loss leader" in any exchange. If the conception of "loss leader" is a fairly common conception in the field of economics, then I have just added yet another Nobel Prize quality demonstration to my list.
Harksaw: I think they do it because the public appreciates the appearance of 'helping out the senior citizens.' Almost nobody will think less of them for it, and a good amount of people will think McDonald's is more of a charitable company.
Ah, yes, the public appreciates it.
The public doesn't mind them frying food in beef lard in Indian countries, putting industrial waste, fecal matter, and large amounts of trans fat in their foods, paying their employees low wages, employing child labor, encouraging obesity including childhood obesity through targeting children, abusing intellectual property law, putting forth misleading advertising, and manufacturing (as opposed to cooking) food which, in my opinion, is rather bland.
...But oh, they provide cheap coffee for the elderly. How sweet. What a wonderful multi-national corporation.
sorry to burst your bubble, rtr, but business runs first and foremost on a cost accounting basis (accountancy profession defines profit and loss in an objective and codified manner). you're confusing economic value with profit and loss (an accounting concept). as you rightly say, exchange occurs even if a notional accounting loss is incurred because there is an expected payoff in non-monetary terms.
good luck with the nobel prize, the million dollars should come in handy!
newson:sorry to burst your bubble, rtr, but business runs first and foremost on a cost accounting basis (accountancy profession defines profit and loss in an objective and codified manner). you're confusing economic value with profit and loss (an accounting concept). as you rightly say, exchange occurs even if a notional accounting loss is incurred because there is an expected payoff in non-monetary terms. good luck with the nobel prize, the million dollars should come in handy!
Price is only tied to cost for purely competitive firms. The less competitive an industry is, the greater the difference between price and cost for firms in that industry.
Larger companies, like McDonald's and Wal-Mart, engage in public relations campaigns and lobbying primarily in order to discourage the public from using the government to regulate them.
I'm sure it has some positive effect on boosting sales from increasing popularity (for consumers who boycott businesses for moral reasons), but it's rather minimal. The idea that they engage in ad campaigns and charity because it's profitable is hilarious!
Nathyn is just here to get a rise out of excitable individuals. He seems to have failed thus far, though.
Inquisitor:Nathyn is just here to get a rise out of excitable individuals. He seems to have failed thus far, though.
No, I'm not.
I really do want to know a lot more about Austrian economics, because even though I think it's a load of you-know-what, it's so widely influential that I frequently come across Austrian economic arguments and they leave me frankly confused. It's hard to dispute a complex argument when you're not exactly certain how it goes.
It's taken me a substantial amount of time and effort to even understand the economic basis for the Federal Reserve and why most economists believe a return to the gold standard would cause a depression.
If I was simply here to get arise out of you, there are far more efficient methods than economic debate.
I'd also like to note that it was one of you guys from the old forum who invited me here!
Okay, then why bring up such an argument pertaining to McDonalds? You accuse Austrians of infusing ideology in things, yet you immediately switch to some problem you have with McDonalds, when the phenomenon being discussed is economic.
I suggest, if you're here to learn, to drop all your preconceptions of what Austrians are or what they believe, and find out what Austrianism in fact consists in. If you're still unsatisfied, then you may pronounce it to be false, or whatever.
Inquisitor: Okay, then why bring up such an argument pertaining to McDonalds? You accuse Austrians of infusing ideology in things, yet you immediately switch to some problem you have with McDonalds, when the phenomenon being discussed is economic. I suggest, if you're here to learn, to drop all your preconceptions of what Austrians are or what they believe, and find out what Austrianism in fact consists in. If you're still unsatisfied, then you may pronounce it to be false, or whatever.
You're right that I should try to avoid bringing up normative economics or politics, a mistake I've made in the past.
I thought it was downright laughable, though, that someone suggested large corporations engage in charity because it's profitable. Because if charity was profitable, why then would there have ever been any poverty, historically? It's such a preposterous non-economic claim which goes against the basics of supply & demand.
I didn't inject ideology into the discussion, but responded to a statement which seemed to reek of "Vulgar Libertarianism." It seemed to reflect a belief that corporations are somehow free-market entities, and I thought I should say something. I can't see how you can disagree with me.
You ought to know that it is impossible for me to fully drop any preconceptions of what Austrian economics is and, being human, it is of course possible that I may be wrong in certain assumptions about what Austrians believe, just as you may be wrong in misunderstanding what I say that Austrians believe.
newson:as you rightly say, exchange occurs even if a notional accounting loss is incurred because there is an expected payoff in non-monetary terms.
The payoff is not "expected". The payoff is immediate. In a business liquidation, some money is better than no money. It's more profitable to sell day old bread for a discount than to dump it in the garbage. This is a very common exchange. Decisions, choices, are economic action, not "notional accounting". You're just failing to see that throwing away day old bread for no money is less profitable than selling day old bread for a discount. Discounting is profitable action; if discounting wasn't profitable action discounting wouldn't occur. You're better off, profiting, from all exchanges, no matter what the "notional accounting" is.
And this may also be the possible reason for McDonald's selling the Senior discount coffee. Working people are on the go early. Seniors may be more liesurely and purchasing the senior discount coffee after the morning rush. McDonald's may be just getting rid of the bottom of the barrel of the brewed coffee with the senior discount.
Nathyn:I thought it was downright laughable, though, that someone suggested large corporations engage in charity because it's profitable. Because if charity was profitable, why then would there have ever been any poverty, historically? It's such a preposterous non-economic claim which goes against the basics of supply & demand.
It promotes the firm's image within the market (i.e. the belief that the firm is giving something 'back'.)
They aren't, so you're correct on that. However, the claim was conjecture as to why the firm may choose to do this, not praise for McDonalds.
You commit the fallacy of comparing ALL the diamonds to ALL the water. Just as a diamondmay be more valuable than a glass of water so too may a charitable donation be more valuable than some other use of what is given. Charity is by definition voluntary action. That means all acts of charity contain the FULL SET choice possibility of making a charitable donation or NOT making a charitable donation. The act of making a charitable donation will *only* occur when the individual subjective valuation of making a charitable donation is GREATER than the individual subjective valuation of not making a charitable donation. Charitable donations can indeed be bundled with fame and image. Bill Gates can choose to make anonymous donations. Bill Gates can choose to create a high profile charitable foundation. But because charity is a choice, because charity is a voluntary exchange, because charity is ACTION, charity is only occurring when that which is receieved is valued more than that which is given away in exchange. Charity and voluntary sacrifice is explained by economics. It's simple subjective preference.
Chairty is profitable. Every person who receives and every person who gives charity increase both their subjective wealth from that exchange. It doesn't matter if it's an individual person or a corporation like McDonald's. It's the action which is analyzed. If charity wasn't increasing wealth, generating economic profit at the moment of exchange, it wouldn't be occurring.
rtr:Chairty is profitable. Every person who receives and every person who gives charity increase both their subjective wealth from that exchange. It doesn't matter if it's an individual person or a corporation like McDonald's. It's the action which is analyzed. If charity wasn't increasing wealth, generating economic profit at the moment of exchange, it wouldn't be occurring.
Inquisitor: This is an instance of product differentiation. Mises addresses the phenomenon in Human Action, and provides a number of reasons as to why it is not the same thing as price discrimination. http://www.mises.org/humanaction/chap16sec10.asp
I don't see how this is an instance of product differentiation. It is a perfect example of price discrimination, no?
Similar to how an Airline will use price discrimination when they sell tickets at a lower price to people buying farther in advance of the flight date, McDonald's is using price discrimination by selling coffee at a lower price to someone who has a lower "willingness" to pay.
How is it product differentiation is the cup of coffee senior citizens buy is the same exact product as the cup of coffee everyone else buys?
obviously, rtr, you don't work in retailing, like yours' truly, so i'll try to take it slowly for you, and i'll even address your "new" example of old bread sold at a discount. now, that baked bread is a sunk cost, ie quantifiable money costs have been incurred. your costing dept will tell you how much gas, flour, water, labour, yeast etc has cost in cold, hard cents. as a retailer, you are hoping to maximize revenues by selling said loaf as fresh bread. as you say, if the loaf doesn't sell, then obviously discounting is still a way of recouping some of the sunk cost. the mcdonald's coffee is not a sunk cost. that coffee not sold to a senior at a discount is sold to a full price customer. so the analogy with the baked loaf is misleading. as for mcdonalds deliberately selling the dregs to seniors, ask yourself how practical it would be, and where would the goodwill be? seniors have tastebuds, too! the decision to cop a monetary loss is management's, and is informed by unquantifiable, non-monetary factors. do you understand the importance of accounting is business? it would seem not.
Wgeary, yes, I already took notice of that. Read the article I provided regarding airlines.
nathan writes:
"Price is only tied to cost for purely competitive firms."
noone suggests that cost and price are mechanically linked. price is whatever you can get from the customers, and is always an educated guess. cost, on the other hand, is perfectly able to be calculated, and will inform the pricing decision. the corporate graveyard is full of example of companies who had plenty of revenue, but couldn't accurately cost their operations. as an aside, the margins of retailers like mcdonald's and especially walmart are very thin, they are volume models. i suspect you're right to doubt the altruistic nature of the discounts, but perhaps it's to deflect criticism from people like you with an axe to grind.
newson:now, that baked bread is a sunk cost, ie quantifiable money costs have been incurred.
Bread isn't baked unless at the moment of baking the baker increases his subjective value profit. The baker at every moment has the choice to NOT bake bread.
newson:your costing dept will tell you how much gas, flour, water, labour, yeast etc has cost in cold, hard cents.
And by definition, the act of baking bread shows that at the moment of baking bread the baker is profiting more than "the cost of gas, flour, labour, yeast, etc.". If the baker at the moment of baking was NOT profiting more than "the cost of gas, flour, labour, yeast, etc.", he would NOT bake the bread.
newson:if the loaf doesn't sell
This is a NEW EVENT. This may represent a *change* in subjective valuation of the baker's potential customer. If so, this signals the baker, and the baker too changes his subjective valuation of the bread as well. Remember, all action is occurring in the present tense.
newson:if the loaf doesn't sell, then obviously discounting is still a way of recouping some of the sunk cost.
Discounting is a NEW event. You can certainly "notionally account". But the act of discounting only occurs because it is subjectively MORE valuable than the act of NOT discounting. This is in strict economic epistemological analysis terms PROFIT derived from action. By ignoring the action part of discounting, "notional accounting" misses the fact that profitable trade action continues to occur in spite of changing subjective valuation. All action whatsoever is a "sunk cost" in the past tense. And "notional accounting" is ARBITRARY, both in what is included and excluded from its guestimate measurement, and in the time period of comparison it covers between events. Example: You buy a house for $300K. You sell that house for $500k. That house is subsequently worth $1M. So did you profit $200K, or did you lose $300k? Both conclusions could be correct under a "notional accounting 'standard'". You have events A, B, and C. From A to B you profit $200K. From B to C you "lose" $500K. From A to C you "lose" $300K. Nobody is omniscient of future changing subjective valuations. But everyone weighs the relative subjective value of things receieved and given away at every moment of trade (and at every moment of individual action).
newson:the mcdonald's coffee is not a sunk cost. that coffee not sold to a senior at a discount is sold to a full price customer.
We don't know that yet. Is McDonald's brewing coffee in a big barrell or is McDonald's brewing coffee in a home-size small coffee jar? And what about individual cups of coffee being drunk by individual coffee drinkers? Does their profitable trade for coffee turn into a loss if they accidentally spill it? If they get distracted at work and leave it sitting on their desk only half drank? If they spill the the last un-drunk 10% of the cup into the sink?
newson:as for mcdonalds deliberately selling the dregs to seniors, ask yourself how practical it would be, and where would the goodwill be? seniors have tastebuds, too!
It might be that the difference in quality between the 100% full to 15% full is not that great a difference between the 15% full to 5% full barrell. And the day to day demand variance warrants a senior discount to clear the inventory. If they use up the barrell they can brew extra coffee in a home-size small coffee jar.
Of course notional accounting in business is important. But that doesn't change the irrefutable fact that discounting only occurs because it is more profitable to discount than to not discount whenever discounting is occurring.
rtr: Wrong. If what you say were true then those businesses would be *BETTER OFF* not making any one of those trades you call "loss leaders". How are those businesses becoming "large" and "successful" if they are giving away their assets for LESS then what those assets are worth? "Accounting loss" is purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade. newson:nobody denies there may be a marketing/social/pscyhological payoff, but this is a different animal. We are talking about strict *economic* profit from exchange. At the moment of every exchange, someone is either A.) better off from doing the exchange, B.) worse off from doing the exchange, or C.) indifferent from doing the exchange. In the cases of B.) and C.) there's absolutely no reason for the exchange to occur. It doesn't matter if the exchange is a "charitable donation", a fire sale sell off of excess inventory, or "free" product samples. All of that action is only occurring because that which is receieved is valued more than that which is given away in exchange; all action is undertaken with the purpose to go to a state of lesser dissatisfaction from a state of greater dissatisfaction. The actions undertaken prior to what you arbitrarily call the "breakeven cost" are *only* undertaken because the subjective value of undertaking those actions (for whatever subjective reasons whatsoever) is GREATER than the subjective value of not undertaking those actions at the moments that every one of those actions were undertaken. Just like "credit" has positive economic value, just like promises have positive economic value, just like expectations, beliefs, hopes, dreams have positive economic value to specific acting individuals. Trading for or accumulating investment capital only occurs because the trading for or accumulating of investment capital profits those that are trading for or accumulating investment capital. The particular use or aim of any marginal unit of investment capital is only occurring because that use is subjectively valued more than any other possible use (or NON-USE) of that particular marginal unit of investment capital. newson:otherwise how could successful/unsuccessful product lines be evaluated. By the automatic "stop loss orders" of the absence or cessation of trade, or by the continued production and trade of those product lines. "Successful/unsuccessful" product lines are evaluated exactly the same way every trade exchange whatsoever is evaluated, by whether or not it is occurring in the present tense. The only reason any action whatsoever, including trade, is occurring in the present tense is because that which is received is valued more than that which is given away in exchange. Even if there is an "accounting loss" from lowered market subjective value of some thing, exchange of that same some thing will still *only* occur if exchange of that same some thing is more valuable than not exchanging that same some thing. It doesn't matter what the "supply" is, it doesn't matter what the "demand" is, it doesn't matter what the "price" is, all exchange only occurs because it increases positive economic value. Therefore, there is no such thing as a "loss leader" in any exchange. If the conception of "loss leader" is a fairly common conception in the field of economics, then I have just added yet another Nobel Prize quality demonstration to my list. "accounting loss" is not, as you put it: "purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade." this is where you going wrong. accounting profit is revenue loss cost. end of story. even successful businesses make accounting losses on various transactions, sometimes intentionally (in the case of loss leaders to attract clientelle), in other cases unintentionally when products and services don't sell at what was hoped for. successful business is not about avoiding a loss of every sale, but rather about making sure that over time the profitable transactions outweigh the unprofitable ones.
"accounting loss" is not, as you put it: "purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade." this is where you going wrong. accounting profit is revenue loss cost. end of story. even successful businesses make accounting losses on various transactions, sometimes intentionally (in the case of loss leaders to attract clientelle), in other cases unintentionally when products and services don't sell at what was hoped for. successful business is not about avoiding a loss of every sale, but rather about making sure that over time the profitable transactions outweigh the unprofitable ones.
in reply to rtr:
"accounting loss" is not, as you put it: "purely a lowering of observed market subjective value that has nothing to do with the action of any present tense trade." this is where you going wrong. accounting profit is revenue loss cost. end of story. even successful businesses make accounting losses on various transactions, sometimes intentionally (in the case of loss leaders to attract clientelle), in other cases unintentionally when products and services don't sell at what was hoped for. successful business is not about avoiding a loss on every sale, but rather about making sure that over time the profitable transactions outweigh the unprofitable ones.
Restaurants give senior discounts because they eat at a different time of the day than the rest of us. They fill tables that would otherwise be empty, so are sought after.
Movies and amusement parks give children discounts because they know that young families would not come otherwise(leaving the kids at home is out of the question) but groups of teenagers still pay full price.
Peace
"accounting profit is revenue less cost. end of story".
is what the fingers wanted to say!
newson:"accounting profit is revenue less cost. end of story".
"Accounting profit" is not *economic* profit. All you need to see to understand that is inflation. If the value of money declines by 50%, many transactions which would show an "accounting profit" would in fact be economic losses. But absolutely every exchange whatsoever, absolutely every present tense action trade, only occurs because strict epistemological economic profit is made from receiving something of more value than that which is given away in exchange.
Your statement would perhaps be correct if you listed a giant assumption: ASSUMING THE SUBJECTIVE VALUE OF "MONEY" REMAINS CONSTANT, which of course it is by definition of trade NOT constant every time it is traded, even irrespective of any changes in the quantity of money.
Here's Mises on "accounting".
"Every businessman includes in his normal cost accounting the compensation for losses which regularly occur in the conduct of affairs. "Regularly" means in this context: The amount of these losses is known as far as the whole class of the various items is concerned. The fruit dealer may know, for instance, that one of every fifty apples will rot in this stock; but he does not know to which individual apple this will happen. He deals with such losses as with any other item in the bill of costs." Part 1, Chapter VI. Uncertainty in paragraph 1.VI.21
"Nor are the assets and liabilities consisting in cash exempt from the indeterminacy inherent in all business accounting items. They depend on the future constellation of the market no less than any item of inventory or equipment. The numerical exactitude of business accounts and calculations must not prevent us from realizing the uncertainty and speculative character of their items and of all computations based on them." Part 3, Chapter XII. The sphere of economic calculation in paragraph 3.XII.5
"Accounting and bookkeeping in their endeavors to establish the result of past action are in the same position as far as they rely upon the estimation of fixed equipment, inventories, and receivables. In spite of all these uncertainties economic calculation can achieve its tasks. For these uncertainties do not stem from deficiencies of the system of calculation. They are inherent in the essence of acting that always deals with the uncertain future." Part 3, Chapter XII. The sphere of economic calculation in paragraph 3.XII.39
"Monetary calculation reaches its full perfection in capital accounting. It establishes the money prices of the available means and confronts this total with the changes brought about by action and by the operation of other factors. This confrontation shows what changes occurred in the state of the acting men's affairs and the magnitude of those changes; it makes success and failure, profit and loss ascertainable." Part 3, Chapter XIII. Monetary calculation as a tool of action in paragraph 3.XIII.5
"Under capitalism the arithmetical operations required for cost accounting and the confrontation of costs and proceeds can easily be effected as there are methods of economic calculation available. However, cost accounting and calculation of the economic significance of business projects under consideration is not merely a mathematical problem which can be solved satisfactorily by all those familiar with the elementary rules of arithmetic. The main question is the determination of the money equivalents of the items which are to enter into the calculation. It is a mistake to assume, as many economists do, that these equivalents are given magnitudes, uniquely determined by the state of economic conditions. They are speculative anticipations of uncertain future conditions and as such depend on the entrepreneur's understanding of the future state of the market. The term fixed costs is also in this regard somewhat misleading." Part 4, Chapter XVI. Prices in paragraph 4.XVI.58
"Cost accounting is therefore not an arithmetical process which can be established and examined by an indifferent umpire. It does not operate with uniquely determined magnitudes which can be found out in an objective way. Its essential items are the result of an understanding of future conditions, necessarily always colored by the entrepreneur's opinion about the future state of the market." Part 4, Chapter XVI. Prices in paragraph 4.XVI.69
"The capital concept is operative as far as men in their actions let themselves be guided by capital accounting. If the entrepreneur has employed factors of production in such a way that the money equivalent of the products at least equals the money equivalent of the factors expended, he is in a position to replace the capital goods expended by new capital goods the money equivalent of which equals the money equivalent of those expended. But the employment of the gross proceeds, their allotment to the maintenance of capital, consumption, and the accumulation of new capital is always the outcome of purposive action on the part of the entrepreneurs and capitalists. It is not "automatic"; it is by necessity the result of deliberate action. And it can be frustrated if the computation on which it is based was vitiated by negligence, error, or misjudgment of future conditions." Part 4, Chapter XVIII. Action in the passing of time in paragraph 4.XVIII.116
"Those who have seen in this fact something puzzling and contradictory have been misled by a misconstruction of monetary calculation and capital accounting. They attempt to assign to capital accounting tasks which it can never achieve. Capital accounting is a mental tool of calculating and computing suitable for individuals and groups of individuals acting in the market economy. Only in the frame of monetary calculation can capital become computable. The sole task that capital accounting can perform is to show to the various individuals acting within a market economy whether the money equivalent of their funds devoted to acquisitive action has changed and to what extent. For all other purposes capital accounting is quite useless." Part 4, Chapter XVIII. Action in the passing of time in paragraph 4.XVIII.134
"It would be a serious blunder to neglect the fact that inflation also generates forces which tend toward capital consumption. One of its consequences is that it falsifies economic calculation and accounting. It produces the phenomenon of illusory or apparent profits. If the annual depreciation quotas are determined in such a way as not to pay full regard to the fact that the replacement of worn-out equipment will require higher costs than the amount for which it was purchased in the past, they are obviously insufficient. If in selling inventories and products the whole difference between the price spent for their acquisition and the price realized in the sale is entered in the books as a surplus, the error is the same. If the rise in the prices of stocks and real estate is considered as a gain, the illusion is no less manifest. What makes people believe that inflation results in general prosperity is precisely such illusory gains. They feel lucky and become openhanded in spending and enjoying life. They embellish their homes, they build new mansions and patronize the entertainment business. In spending apparent gains, the fanciful result of false reckoning, they are consuming capital. It does not matter who these spenders are. They may be businessmen or stock jobbers. They may be wage earners whose demand for higher pay is satisfied by the easygoing employers who think that they are getting richer from day to day." Part 4, Chapter XX. Interest, credit expansion, and the trade cycle in paragraph 4.XX.36
It's the product of the current government-supported oligopolies. It's oligopolistic competition. They can produce more money without lowering the price. If there are more competitors, they would lower the cost, since consumers would have more options to choose from.
rtr states:
the act of baking bread shows that at the moment of baking bread the baker is profiting more than "the cost of gas, flour, labour, yeast, etc.". If the baker at the moment of baking was NOT profiting more than "the cost of gas, flour, labour, yeast, etc.", he would NOT bake the bread.
this is where you part company with the real world. when the baker bakes his load, he expends a known amount of money. his inventory now includes one loaf of bread. note there is no accounting profit until a sale is effected. the loaf of bread is baked only on the expectation of a sale at a profitable price. check with the s.e.c. if you don't believe me. if the baker has decided to lure new customers into his bakery with "crazy prices" (ie below his cost of production), he will register a real monetary loss on every loaf sold. obviously if he continue long enough down this road, or bakes enough loaves he will eventually go broke via this "loss leading" strategy. many times companies do underprice their products relative to costs (going for market share, poor accounting, etc) and end up in liquidation. if expectations were the same as real profits, well..show me one businessman who isn't optimistic about his future prospects.
sadly, it's only when the cash-register rings that the verdict is drawn. and to reiterate, it's not one sale, but the average profit/loss over all sales that sees the concern flourish or die.
newson:this is where you part company with the real world. when the baker bakes his load, he expends a known amount of money. his inventory now includes one loaf of bread. note there is no accounting profit until a sale is effected. the loaf of bread is baked only on the expectation of a sale at a profitable price.
You fail to account that value is subjective. You fail to account that the baker values baking the bread more than not baking the bread at the moment he bakes the bread, for whatever subjective reasons entirely his own. It doesn't matter if others don't value the baker's action until the product of the bakers action is offered for exchange by the baker to those others AT A FUTURE TIME. Nobody is omniscient. And even if others at a future time value the baker's production less than what the baker valued his production AT A PAST TIME, if he trades his production away anyway IN PRESENT TIME, he still values what he receives from the others in exchange more than the product he trades away. Less of a loss is still more profitable than more of a loss. What has occurred prior to that transaction is the baker too has lowered his subjetive valuation of his product, and given that lower subjective valuation, he still increases his value received from trade; the trade is generating positive economic value profit. The fundamental point is the baker would not trade away his bread if it was generating further loss, even if he considers his previous production activity as a loss.
If you are down $5,000 and you make $1,000 back you don't say you are now $6,000 down, you don't say you lost an additional $1,000, you say you *made* $1,000, and are now only $4,000 down. You are less down than you were before. "Made" is positive, "made" is profited, for that marginal $1,000, from that action. You confuse a specific limited action from a trade with previous actions as a whole (and that's a huge fallacy in a lot of current economic theory). Trade is always generating present tense positive economic value no matter what the overall accounting is from lumping seperate different tense actions together. But this is an especially important point: only changing subjective valuations can generate loss (from voluntary market action, of couse violence and natural disasters can cause economic loss). And I'll be getting the Nobel Prize for that demonstration (if not for in and of itself, for as it applies to the ABCT and any and all other business cycle theories for that matter), thank you very much. And that recognition is the key recognition to economic theory in the 21st century (there's a whole lot of economic demonstrations that follow from it).
get in touch when you win the nobel prize, and i'll shout you an epistomology-free mcdonalds coffee. just for the subjective hell of it.