Economics Questions

Re: What's wrong with this analysis? (More demand causes lower prices)

Lyle — Wed, 12 Jan 2011 05:36:10 GMT

Demand doesn't guarantee production, especially when the demand is created artificially. Prices will only drop if production exceeds demand. Sounds to be an argument created to justify booms through expansion of the money supply.

Re: What's wrong with this analysis? (More demand causes lower prices)

AustrianAdvocate — Wed, 12 Jan 2011 04:06:36 GMT

I asserted that Chinese exports prices to the Western countries could go higher. In a free market the "substitution effect" and general equilibrium would cause prices to fluctuate, but, to stay still. In a monetary inflation market like we have now; when domestic prices goes higher every year, if imports prices become more expansive it could cause the "substitution effect" to be negligible. Then, velocity of money could accelerate. [ Of course to cause more inflation].

Re: What's wrong with this analysis? (More demand causes lower prices)

Smiling Dave — Tue, 11 Jan 2011 19:00:44 GMT

AustrianAdvocate:

"Demand is supply" is true only in a "closed" market. In the Chinese case, the supply is influenced by the rest of the world and Chinese demand. If the demand growth rate in China overcomes Europe's it would increase prices in Europe. The reason is that an expanding portion of the Chinese production would go to domestically consumption; and then Chinese supply to Europe will be reduced and result in higher prices.

I don't get this. No matter how many other players are involved, China and Europe trade with each other face to face, and so whatever China takes from Europe she gives something in return.

Hmm, maybe you mean this: Iraq produces oil, which Europe and China want. So China buys a lot of it up, leaving Europe with less. Thus prices are raised in Europe for oil. And in China too for that matter.

But again, how does the price of EVERYTHING go up in Europe? Since they have to pay more for oil, they will buy less of everything else, making the price of everything else go down. After all, China isnt gobbling up everything. On the contrary, it is flooding the world with stuff.

Conclusion: It's a red herring, and the real reason prices are going up in Europe is from their version of QE.

Re: What's wrong with this analysis? (More demand causes lower prices)

AustrianAdvocate — Tue, 11 Jan 2011 17:57:15 GMT

"But demand is supply. Demand is the stuff you offer in exchange for other stuff: if the Chinese are demanding more, it means they have produced more stuff".

"Demand is supply" is true only in a "closed" market. In the Chinese case, the supply is influenced by the rest of the world and Chinese demand. If the demand growth rate in China overcomes Europe's it would increase prices in Europe. The reason is that an expanding portion of the Chinese production would go to domestically consumption; and then Chinese supply to Europe will be reduced and result in higher prices.

In the last decade, the Chinise production grew in faster rate the Chinese consumption. [ Mainly because Chinese currency manipulation] which led to lower prices in the rest of the world for Chinese production

Re: What's wrong with this analysis? (More demand causes lower prices)

Smiling Dave — Tue, 11 Jan 2011 13:53:19 GMT

Kaiser,

In your three country scenario, how did China get euros to buy European things? By selling to the USA, getting dollars from there, and exchanging them for euros. So that the Europeans can, in theory stock up on American goods, and so the OP's reasoning is still valid.

Of course, if the US doesnt have enough worth buying, meaning their money is not worth much, the the Europeans are going to suffer. But that is not because China increased its demand.

Re: What's wrong with this analysis? (More demand causes lower prices)

Maurizio Colucci — Tue, 11 Jan 2011 11:16:49 GMT

I think the channel was Rai News, about 9 days ago, in the morning. Sorry, I don't remember the economist name (I seldom follow Italian economists). I would perhaps recognize him if I saw his face. :)

Re: What's wrong with this analysis? (More demand causes lower prices)

Kakugo — Tue, 11 Jan 2011 11:06:57 GMT

Who was the original economist and what channel was his interview broadcasted on?

(Sorry for using English but I want everybody here to understand what we are saying )

Re: What's wrong with this analysis? (More demand causes lower prices)

Isaac "Izzy" Marmolejo — Tue, 11 Jan 2011 09:13:54 GMT

After reading the article that you posted, they say that a rise in demand ( rise in population) is causing the rise of price for food because food is becoming more limited because we are at the beginning stages of overpopulation. Most Austrians would say that this is simply not true because this world is not a zero-sum game.

your question is something like "how is a rise in demand resulting in higher prices?" Well, lets assume that this overpopulation myth is true. this overpopulation becomes in expectation and expectations are a determinate for a SHIFT in the demand curve, in this case to the right. This shift is what causes the higher prices(all else equal)... Does this contradict with part of the law of demand that more demand along the demand curve causes lower prices? No, because the latter is referring to changes along the demand curve while the former is referring to a shift of the demand curve due to a determinate.

Now, this is only assuming this overpopulation myth as fact, but in the real world, it is false because this world is not a zero sum game... These mainstream economists that stress this myth are piling a whole bunch of assumptions and claim it to be fact...

Re: What's wrong with this analysis? (More demand causes lower prices)

Kaiser434 — Tue, 11 Jan 2011 08:19:17 GMT

Is there any reason that you are assuming that the production of China is offering is in Europe? I can invision a scenario where the purchasing power of China goes up due to selling to one region such as the US and the finite supply of goods that they purchase from a different region such as Europe goes down which raises prices there. Its a global market. It seems really plausible to me that an industrial power on the rise as it adopts more free market ideas (not many but some) would drive up prices in a rapidly decaying socialist hell by diverting goods to their market with capital they aquire by selling to a freer market.

In short the only thing I can see wrong with your reasoning (and I am not an economist so take it with a grain of salt) is that you are assuming 2 players when it is a multi-player global market.

Re: What's wrong with this analysis? (More demand causes lower prices)

Maurizio Colucci — Tue, 11 Jan 2011 08:16:13 GMT

Sorry, I saw it on television, it was an Italian economics interviewed on the Italian national news.

Also Paul Krugman (who else? :) ) seems to say this if I am not mistaken (here).

Re: What's wrong with this analysis? (More demand causes lower prices)

Isaac "Izzy" Marmolejo — Tue, 11 Jan 2011 08:09:30 GMT

can you give us an article or some reference that talks about those economists saying this?

What's wrong with this analysis? (More demand causes lower prices)

Maurizio Colucci — Tue, 11 Jan 2011 08:05:18 GMT

Hi,

Some economists are attributing the increased prices in Europe to increased demand from China. The following reply came to my mind:

Is this even possible? Suppose the increase in prices is actually due to increased demand from the Chinese. But demand is supply. Demand is the stuff you offer in exchange for other stuff: if the Chinese are demanding more, it means they have produced more stuff; and that they are offering it against other stuff; i.e. they are giving more stuff to European sellers in exchange for other stuff. So there is more stuff in Europe. So prices in Europe should go down, not up.

Could you tell me what's wrong with this reasoning, as it seems to prove a very unlikely proposition, namely that increased demand should cause lower, not higher, prices? Thanks