Economics Questions

Re: On the free market wouldn't producers have minimal incentive to increase supply

Harry Felker — Tue, 21 Jul 2009 23:59:43 GMT

DD5:
The likelihood o f “reinvestment in the firm" or any additional capital investment would depend on expected profits. Any expected "decreasing profits" is likely to achieve the opposite of what you suggest; a loss of capital, or less additional capital then if profits were expected to increase.

You are right...

DD5:
It doesn't follow that employing additional capital to increase supply, necessarily increases profit. It may well be the reverse.

That is why I qualified "can" not "will"

Though with the light of this entry, you are right, my thought would most likely lead to malinvestment...

Re: On the free market wouldn't producers have minimal incentive to increase supply

DD5 — Tue, 21 Jul 2009 23:35:48 GMT

Harry Felker:

DD5:

Are you saying that the entrepreneur will strive to increase supply as long as he doesn't suffer a loss? Why should he behave in such an irrational way?

The entrepreneur will strive for maximum profits, not maximum supply! It is this last point that is crucial to understand for it is exactly what makes the capital allocation process of the market so efficient.

I am saying that an entrepenuer will strive to increase his profits, and this can be achieved by increasing his supply, lowering price and increasing demand, sometimes this has the initial effect of decreasing profits in expectation that reinvestment in the firm will pay off in larger profit, or am I wrong in thinking that reinvestemnt should be deducted from the profits?

The likelihood o f “reinvestment in the firm" or any additional capital investment would depend on expected profits. Any expected "decreasing profits" is likely to achieve the opposite of what you suggest; a loss of capital, or less additional capital then if profits were expected to increase. It doesn't follow that employing additional capital to increase supply, necessarily increases profit. It may well be the reverse.

An entrepreneur may increase his supply by employing more factors, but only at the expense of less factors for the production of something else. Additional capital will tend to be employed to increase supply for a given factor as long as that capital cannot yield a higher rate of return (profit) somewhere else. In this way, capital always tends to be employed for the service of the most urgent needs of the consumers. A net increase in supply of goods in the economy is possible only to the extent that there is net savings (capital accumulation)

Here is Mises on the matter from Profit & Loss:

That the production of a commodity p is not larger than it really is, is due to the fact that the complementary factors of production required for an expansion were employed for the production of other commodities. To speak of an insufficiency of the supply of p is empty rhetoric if it does not indicate the various products m which were produced in too large quantities with the effect that their production appears now, i.e., after the event, as a waste of scarce factors of production. We may assume that the entrepreneurs who instead of producing additional quantities of p turned to the production of excessive amounts of m and consequently suffered losses, did not intentionally make their mistake.

Re: On the free market wouldn't producers have minimal incentive to increase supply

Harry Felker — Tue, 21 Jul 2009 22:16:36 GMT

DD5:

Are you saying that the entrepreneur will strive to increase supply as long as he doesn't suffer a loss? Why should he behave in such an irrational way?

The entrepreneur will strive for maximum profits, not maximum supply! It is this last point that is crucial to understand for it is exactly what makes the capital allocation process of the market so efficient.

I am saying that an entrepenuer will strive to increase his profits, and this can be achieved by increasing his supply, lowering price and increasing demand, sometimes this has the initial effect of decreasing profits in expectation that reinvestment in the firm will pay off in larger profit, or am I wrong in thinking that reinvestemnt should be deducted from the profits?

Re: On the free market wouldn't producers have minimal incentive to increase supply

Paddie — Tue, 21 Jul 2009 18:52:43 GMT

I think there is a little bit of confusion on this thread. I think some might be referring to manufacturing and economies of scale while others are referring to a surplus of goods for a particular firm.

If we are talking about manufacturing, the more of an item we produce the less the manufacturing cost of each individual item, not the price of the product when sold to the end consumer. It is cheaper to set the die for one item and run a huge lot of them at one time, resources per unit are cheaper when bought in bulk, etc. Maybe that makes sense.

As for a product surplus, there is no way a firm wants to carry a larger than neccessary supply of goods. It is ridiculous, especially if the goods are perishable or require certain temperatures, take up alot of space and so on. Firms don't intentially create large un-sellable quantities of their products. A large surplus of goods in a warehouse is usually an accident. Some salsemen couldn't make the sell, An economist fudged the forecast, etc. When that accident occurs the firm needs to dump their inventory usually to make room for more, newer inventory or maybe just recover their cost. When they sell these goods they will lower the price from the previous price just to get them out of the door. Inventory space is limited. Thats what is meant by an increased supply lowering the price or value of the good.

You can take the same concept and apply it to the American dollar. The value of the dollar is decreasing because they manufactured too many of them.

Re: On the free market wouldn't producers have minimal incentive to increase supply

DD5 — Tue, 21 Jul 2009 18:23:14 GMT

Harry Felker:

inquisitiveteenager:

but if this interferes with their profits then there would beno incentive to increase the supply.

Only if there is a loss, or so small a profit that the business cannot meet interest payments to investors....

Are you saying that the entrepreneur will strive to increase supply as long as he doesn't suffer a loss? Why should he behave in such an irrational way?

The entrepreneur will strive for maximum profits, not maximum supply! It is this last point that is crucial to understand for it is exactly what makes the capital allocation process of the market so efficient.

Re: On the free market wouldn't producers have minimal incentive to increase supply

Harry Felker — Tue, 21 Jul 2009 17:40:01 GMT

inquisitiveteenager:
An increase in supply lowers the price of the product

True, it makes the manufacturer more competitive within his business field...

inquisitiveteenager:

but if this interferes with their profits then there would beno incentive to increase the supply.

Only if there is a loss, or so small a profit that the business cannot meet interest payments to investors....

inquisitiveteenager:
They might store up the good and sell it later.

Highly unlikely, if their product is selling they will sell it, not hold it, One cannot tell what the future holds, innovation can make a product obsolete....

Think of it this way, If Tandy held back on sales of the T-1000 (or whatever that old POS was), how would they be doing right now? If a farm owner were to hord food, how valuable is it as it rots? Science and technology are the bane to this mentality you are talking about, not to mention competition business...

Re: On the free market wouldn't producers have minimal incentive to increase supply

JAlanKatz — Tue, 21 Jul 2009 17:13:30 GMT

inquisitiveteenager:

An increase in supply lowers the price of the product, but if this interferes with their profits then there would be

no incentive to increase the supply.

They might store up the good and sell it later.

If this analysis were correct, it would imply that profits are maximized by not producing anything. So there must be problems with the analysis. What are they?

First, the firm does not necessarily control total supply of its product and substitutes. It might be that others will increase supply anyway, lowering prices. So the question for the firm is whether they wish to see their sales volumes remain the same and prices fall, or their sales volumes increase and prices fall.

Second, the statement that prices will fall does not imply that profits will fall, nominally or really. The question is what happens faster - increased sales or drop in prices. If the prices will fall faster than the sales will rise, then yes, profits will be lessened. However, what type of situation would that describe? Wouldn't it describe a situation where to increase supply would divert resources from ends more desired by consumers?

Re: On the free market wouldn't producers have minimal incentive to increase supply

DD5 — Tue, 21 Jul 2009 16:24:54 GMT

krazy kaju:

An increase in the supply lowers the price, which increases demand for the product. Moreover, a lower price at your store means that you are stealing customers from other businesses, selling more products, thus earning higher profits.

The supply will depend on the demand curve. An increase in supply requires employing more factors. The objective is not to increase supply, but to increase profit. The two are certainly not the same, but the way you describe it, they always are.

The objective is to adjust your resources, so to be able to produce such a supply that the price of the article that satisfies its demand yields the highest return possible on the factors employed.

Re: On the free market wouldn't producers have minimal incentive to increase supply

krazy kaju — Tue, 21 Jul 2009 16:05:59 GMT

An increase in the supply lowers the price, which increases demand for the product. Moreover, a lower price at your store means that you are stealing customers from other businesses, selling more products, thus earning higher profits.

Re: On the free market wouldn't producers have minimal incentive to increase supply

Esuric — Tue, 21 Jul 2009 15:50:16 GMT

It all depends on price elasticity.

Re: On the free market wouldn't producers have minimal incentive to increase supply

DD5 — Tue, 21 Jul 2009 15:48:24 GMT

inquisitiveteenager:

An increase in supply lowers the price of the product, but if this interferes with their profits then there would be

no incentive to increase the supply.

They might store up the good and sell it later.

The only incentive is to increase profit!

The supply is not larger then it is because the factors required to produce the article are scarce. Whether more resources are recruited in order to increase production depends on whether those resources can be more efficiently employed to produce a different article, an article that is in higher demand (more urgent for consumers), which results in more profit for the entrepreneur.

I recommend you read Profit & Loss by Ludwig von Mises.

Re: On the free market wouldn't producers have minimal incentive to increase supply

Paddie — Tue, 21 Jul 2009 14:42:48 GMT

Businesses don't intentionally create a large supply of their products to lower the price consumers are willing to pay. It happens because of bad sales forecasting or competing companies products. In the on-demand age we live in now most companies can produce goods as they are demanded if the they are left alone to do so. The last thing a company wants is to have a warehouse full of inventory they can't move. Same is true with the dollar. Supply should be created because the working man is making more money because his company is selling more products.

Re: On the free market wouldn't producers have minimal incentive to increase supply

ivanfoofoo — Tue, 21 Jul 2009 14:10:53 GMT

inquisitiveteenager:

An increase in supply lowers the price of the product, but if this interferes with their profits then there would be

no incentive to increase the supply.

They might store up the good and sell it later.

What you're talking applies to a single-seller situation (wrongly called monopoly). Besides that, he would be in a difficult situation, as he would have to balance the supply/price of his products in order to avoid discourage potential competitors from entering the market.

In a multiple-seller situation, if they lower the price of the product, they will be outcompeted.

Re: On the free market wouldn't producers have minimal incentive to increase supply

Esuric — Tue, 21 Jul 2009 14:00:52 GMT

Which situation is more profitable?

100 apples sold at $1.40 each, or 70 apples sold at $1.70 each?

On the free market wouldn't producers have minimal incentive to increase supply

inquisitiveteenager — Tue, 21 Jul 2009 13:24:28 GMT

An increase in supply lowers the price of the product, but if this interferes with their profits then there would be

no incentive to increase the supply.

They might store up the good and sell it later.