Equal Distribution of Wealth, or "Would You Take one For the Planet"?

[crystal]

You obviously don't understand economics, and are spouting buzzwords like labour theory of value. I never mentioned that at all. I said that CHANGES in the cost of labour are reflected in CHANGES in prices. That's not Marx, that's just basic common sense. If you want to see the demand side of things, read Yom's post, or my post #21 (basically, if people only have $11,000 per year to spend, they're not going to buy a car for $20,000 are they, so prices will fall in line). I was just verifying it with what I know about business and industry; which, incidentally, has nothing to do with Marx, and is mostly basic common sense.

First of all, I'm not trying to insult anybody, but some responses seem funnier than others. I also think you are either omitting important facts about economics or then your theories are just false. Let me explain:

In general, prices are determined by the cost per unit of production. The price per unit of production is in general fixed (and this is even more the case if everyone must be paid $11,000 p/a), and the demand at that price is met by the number of units produced (i.e. the supply).

No, prices are determined by supply and demand. In ideal situation, both of them should always reach equilibrium. That's how it has been and will be. Consumers don't care a bit about the cost of production, the only thing that matters is the quality/price ratio. Profit margins also vary widely in different industries. The competition between companies is the element which drives prices down (or up, if there's no competition).

In general, prices increase when the cost of labour increases and decrease when the company increases efficiency per unit of labour. Assuming this is true and the only truth, lets say demand for a particular good increases.

Oh, no! Prices don't automatically increase when "cost of labour increases" or "decrease when the company increases efficiency per unit of labour". Companies will always try to sell products at the highest possible price. Why the heck should one lower profit margins if one gains a competetive edge over competitors?? Again, it's the competition between companies which drives prices down until an equilibrium between supply and demand is reached.

An increase in demand would lead to an increase in supply, which would lead to an increase in profit without an increase in prices. The company can now invest in improvements that would increase its efficiency, which means lower prices. Lower prices means people can buy more stuff; more of our company's stuff, or more of other company's stuff, i.e. an increase in demand for goods from other companies. These companies experience similar effects, and similarly invest, and similarly reduce prices. Thus the standard of living can increase through an increase in demand for a certain good.

Umh, I'm not sure what you trying to say here, but in free market conditions supply and demand should always reach equilibrium... oh wait, I already said that. I'd call it Austrian school of economics.

 

[Mise]

Crystal, you really need to realise that small businesses and large manufacturers alike don't draw nice neat supply and demand graphs and then set the price at where they cross. I mean, how exactly do you measure demand? BY HOW MANY UNITS YOU SELL! These theories are nothing revolutionary, Crystal; they are infact standard economic principles tried and true. Really, ask your parents before you spout buzzwords like the Austrian school and Supply and Demand...

Prices are not determined by supply and demand. They are determined by the unit cost of production plus a mark-up. The profit is therefore (the cost per unit - mark-up per unit) * number of units sold. No knowledge of the "demand" or "how much people are willing to pay" is neccessary, and this is how businesses operate.

Ok here's a little thought experiment for you to do. You own a shop selling only one good. You buy 200 units of the good at $1 per unit. You sell all 200 units in your first week at $2 per unit, making a profit of $200 (or $1 per unit). You realise that, potentially, there is demand for more than 200 units. You have two choices: you can either increase prices and make more profit per unit, or you can increase the number of units you sell, keeping the prices the same, and make more total profit. The first option sounds appealing, but isn't a very good choice. The better option would be the second, which is to use your profits to buy, say, 400 units this week and sell them at the same price, because this expands your business and doubles your market share. You buy 400 units at $1 each and sell 360 at $2 each, giving you a profit of $320. You realise that you have too many units and not enough demand for them, so you decide to use your profits to lower prices per unit to $1.80. This would lead to equilibrium of supply and demand. You are now making a profit of $320 per week. In our model, we have neglected overheads, such as the cost of the building, the wages of the employees, etc, but in practice, any profit made could be used to improve the efficiency of your business, which leads to increased profit through increased units sold, or you could use it to set up an identical shop in another city, and operate on the same principles. This is how growth occurs, Crystal.

Umh, I'm not sure what you trying to say here,

Yeah, I guessed as much...

Oh, no! Prices don't automatically increase when "cost of labour increases" or "decrease when the company increases efficiency per unit of labour".

Yes they do; if prices fall, more people will be willing to buy them, therefore they will sell more of them, increasing profit and enlarging their market share. If they had increased their prices, they would have increased their profit, but no growth would have occured. This is pointless in a discussion of economic growth, and generally doesn't happen, considering the competitive nature of business. Similarly, if the cost of labour increases, the price at which the company sells its products must increase. This is a frequent arguement used by the right against the left unions when they bargain for higher wages -- they are merely driving prices up.

 

[crystal]

Mise, this conversation hardly serves any purpose any more, but I'll still summarize my points:
- There are other ways too to measure demand, like for example doing market research or observing competitors.
- Lowering prices might increase demand, but it's NOT guaranteed. Potential market sizes are always limited, due to geographical and other reasons. If a company manages to cut costs, they might settle for higher profit margins instead of trying to increase market share.
- In fact, companies rarely do keep any notable spare production capabilities. Investments in production take time and the market situation might have changed after that, too.
- Profit margins and market shares are not strictly related to each other. It's no surprise that profit margins vary widely from industry, and increasing market share is a separate decision from production costs, in case profits are lowered or increased.

 

[Mise]

Mise, this conversation hardly serves any purpose any more, but I'll still summarize my points:

Well not when you ignore economics just because the implications are not to your likings... Or when you claim that my economic theory is wrong, and then cite wrong or irrelevant economic theory to explain why...

- There are other ways too to measure demand, like for example doing market research or observing competitors.

In reality, that rarely happens. Most companies know from experience what to do when they experience a change in demand. Market research will NEVER replace experience (unless, of course, you've solved the calculation problem and now have infinite knowledge of the market, in which case communism can't fail ). And market research is normally done to determine how much is demanded, and then make enough goods to meet that demand...

- Lowering prices might increase demand, but it's NOT guaranteed.

This is called price elasticity of demand, which you would be aware of if you knew any basics of economics. It, however, does NOT disagree or invalidate the procedure; rather it backs it up quite nicely.

- In fact, companies rarely do keep any notable spare production capabilities.

...then it's a bad company... Most companies hire and fire workers to meet demand expectations.

Investments in production take time and the market situation might have changed after that, too.

When did I say otherwise?

- Profit margins and market shares are not strictly related to each other.

I never said they were!

It's no surprise that profit margins vary widely from industry, and increasing market share is a separate decision from production costs, in case profits are lowered or increased.

You missed the point, obviously. The point is, the market share AND profits are increased by selling more goods (which means immediate company growth), whereas by merely increasing prices, ONLY increases profit (which means no immediate growth, but perhaps investment in efficiency, which eventually yields growth).

Either way, profit leads to growth, regardless of whether wages are fixed or not, and profit still occurs, regardless of whether wages are fixed or not.