Demand Side Economics

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I was listening to Thom the other day when he had Robert Riech on the show and I've heard them both (as well as others) speak previously of demand side economics. The theory that it is soley demand that drives the economy and that if you can put money in anyone's hand you will increase economic activity. It is often accompanied by the statement that supply side economics is a hoax. This argument is also used to promote high wage doctrines and oppose tax cuts for the "wealthy" (or who I term the entrepreneur or investor).

Scenario #1

Take any third world village or town where its members walk five miles a day to get buckets of water, lack food, have no medical care, no electricity or other souce of energy, and no security. There is no store, utility company, medical center, etc. within hundreds of miles. The demand side doctrine would say, give these people some money and they will create economic activity. But from a practical perspective you could give each member of the community $100 a week and it would be worthless to them because they have no where to spend the money. So even though they have DEMAND they have no supply of goods and services -- the money is worthless to them and their lives are no better off.

Scenario #2

The supply side doctrine would say offer an entrepreneur an incentive to buld a store, utility, or medical center. The investment would provide needed goods and services and create jobs for the members of the community where they could earn money to purchase goods and services (i.e. jobs at the store, utility, etc.). Those that didn't receive employment from these investments would still be able to offer goods or services that those who were employed would be able to pay for because of their employment therefore creating economic activity and creating a financial flow of money. Then those in the second group would be able to purchase goods and services from the store, utility, or medical center. Lather, rinse, repeat. Lather, rinse, repeat.

The supply side scenario sounds much more logical to me than the outcome of the demand side scenario.

In another scenario lets say I have a demand for for a flashlight and batteries. Because money has been put into my hands I can quench this demand by going to the store and purchasing a flashlight and batteries.

In a supply side scenario I go to the same store but the store displays many other goods that I had no demand for when I walked into the store. But because of supply side economics I not only purchase the flashlights and batteries, but I also purchase a handy dandy new shower head, some telfon tape, and a tool to install the shower head.

Which scenario created more economic activity? The one based soley on demand, or the based soley on supply?

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miwingman
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Economics 101:
First there is population, then there is employment, which leads to income, which leads to demand. Greater population = more jobs/supply to meet population-created demand (not demand for jobs but demand for services/goods etc). That is a law of economics.

Of course simply exploding the population would be extremely negative in the long run, and is what we have been doing for the past 8,000 years since the invention of agriculture. That isn't my point at all though. (Side note: We grow enough food for 6 billion people when we only have 5 billion then magically a decade or so later we have 6 billion people, but then we still have famine etc. so we produce more and grow more and on and on. We keep pumping up supply and demand meets it to remain in equilibrium!)

Supply (people), if able will rise to meet demand (jobs) so price (wages) is in equilibrium (or close). If supply decreases, and demand remains the same, than price will increase. The best way to get wages to increase is to reduce the amount of people in the work force. Reduce the age you can draw on social security would be one way to do that.

If you build a store, that does not create demand (not saying you are claiming that). That is a myth that if you build it they will come. Only people create demand. Building a store would satisfy a demand if the demand is present. It would create additional supply.

What trans-national corporations with manufacturing based in China do is flood the market with supply. This reduces price because demand remains relatively constant. When they reduce price it puts Americans out of work who are unable to reduce price because of fair wages, labor standards, human rights etc. Some of these corporations actually set their price at below what it costs to make it initially for that exact purpose.. annihilating the competition to create a monopolistic atmosphere of zero competition in which they can rise the price to their liking because they are now the only source of supply.

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makuck
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Mar. 31, 2010 10:13 pm

The first lesson of 101 economics should be,"people create money,not money create people".Their`s a lot of deprogramming to do.

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tayl44
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Jul. 31, 2007 4:01 pm

Probably confusing need with demand (purchasing power) isn't the best way to make an illustration.

If there isn't demand (purchasing power) there will be no incentive to create the supply..

Retired Monk - "Ideology is a disease".

polycarp2
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Jul. 31, 2007 4:01 pm

I apoligize in advance for the long post but I can attest that it was thoughtfully prepared and edited.

Quote makuck:Economics 101: First there is population, then there is employment, which leads to income, which leads to demand.

I'm trying to digest your post but I'm having a problem with this first sentence. When a baby emerges from the womb he immediately has demands (i.e. needs), comfort, warmth, food, etc. There is no employment and no income yet there is demand. Similiarly in my Scenario #1 there is a population and there is demand yet no employment or income. I would argue that you don't need employment or income in order to have demand.

Greater population = more jobs/supply to meet population-created demand (not demand for jobs but demand for services/goods etc). That is a law of economics. Of course simply exploding the population would be extremely negative in the long run, and is what we have been doing for the past 8,000 years since the invention of agriculture. That isn't my point at all though. (Side note: We grow enough food for 6 billion people when we only have 5 billion then magically a decade or so later we have 6 billion people, but then we still have famine etc. so we produce more and grow more and on and on. We keep pumping up supply and demand meets it to remain in equilibrium!) Supply (people), if able will rise to meet demand (jobs) so price (wages) is in equilibrium (or close).

The increase in population theory is interesting but seems to be off topic. Nevertheless there appears to be an assumption in your statement that jobs just magically appear without the mention of the entrepreneur. In other words in any population there are those who have an idea (technology) who are willing to risk capital in order to produce and sell goods or services.

The amount of capital may be large or small and the risk may vary as well. For example, producing a water supply for a market of thirsty people appears to have a small risk, although it may require a large amount of capital, and the risk could be high if the market has no means to pay (or any method of exchange) for the water supplied.

So if a market of thirsty people has no means of technology or capital to produce a water supply there will be no jobs, no income, and no water -- yet there will still be demand.

My point is that your statements disregard the "producer" -- the person that has an idea (technology) and either has the capital or can acquire the necessary capital (through investors), to implement the idea (i.e. a business) that generally creates employment opportunities (i.e. demand for labor). It is not a given that this will happen automatically because not everyone is an entrepreneur and in a given market there may be no entrepreneurs.

The producer will continue to produce as long as their is a certain amount of return for their own capital and labor (investment) and costs to acquire capital. Barriers to production that reduce the amount of return will ultimately require the producer to stop producing. This could take the form of low or no sales of their good or service due to low or no demand or competition, higher than expected costs to produce (labor, materials, capital, or regulation), higher costs of capital or no capital for their idea, or the reality that their "idea" was not that great to begin with. Once a producer stops producing their labor demand ceases to exist and results in unemployment.

I agree with your point that if a producer/supplier brings a good or service that is in demand to a market that has no means of exchange for that good or service it is unlikely that the producer will be sucessful in selling his good or serivce.

This is where trade comes into play in that every market needs to be able to trade with domestic or global trading partners (free trade) with something of preceived equal value. And at a micro level every person needs to recognize and hone their specialization. And of course if your specialization is not in demand or has low demand than income or wages from that specialization will be low or nonexistent. Then it is time to either improve your speciliazation, accept the lower wage or income, go to where that specialization is in demand, or find a new specialization.

When organizations or governments try to artifically create demand for a specialization that is in low demand (protectionism) there fighting against the forces of natural economic flow to a determint of labor and the consumer.

If supply decreases, and demand remains the same, than price will increase. The best way to get wages to increase is to reduce the amount of people in the work force. Reduce the age you can draw on social security would be one way to do that. If you build a store, that does not create demand (not saying you are claiming that). That is a myth that if you build it they will come. Only people create demand. Building a store would satisfy a demand if the demand is present. It would create additional supply.

Although I agree that the laws of supply and demand can be rightfully applied to the work force (if there is a high demand for a certain labor yet a low supply the price of that labor will increase), I reject the idea that intentionally reducing the number of people in the work force is valid because it implies that a successful economy that generates high paying jobs requires the cajoling of the labor market by some higher power, government regulation or program, or central planner.

The idea of "if you build it they will come" (i.e. invention) has been proven throughout history as new products and services that no consumer had every thought of, and therefore never conceived any "demand" for, have been very successful in generating economic activity and employment. For example, no one had a demand for a "pet rock". No one had demand for "Facebook". Even people who had demand for entertainment never had demand for "Halo", "Halo 2", etc. Your statement severly discounts invention (which requires the technology, capital, and the hope of returns in order to be sustained).

What trans-national corporations with manufacturing based in China do is flood the market with supply. This reduces price because demand remains relatively constant. When they reduce price it puts Americans out of work who are unable to reduce price because of fair wages, labor standards, human rights etc. Some of these corporations actually set their price at below what it costs to make it initially for that exact purpose.. annihilating the competition to create a monopolistic atmosphere of zero competition in which they can rise the price to their liking because they are now the only source of supply.

When Americans purchase those products at lower prices then they were available before it increase their purchasing power and enables them to purchase other products that they would otherwise not be able to purchase. This real gain for all consumers far exceeds the temprorary losses of the few who may find themselves unemployed due to competition.

Those who are unemployed in your scenario and Americans in general should strive to apply their labor and talents (technology) into producing higher valued goods and services that their competition cannot produce (in other words create a labor force and goods and services that others cannot compete with) instead of trying to protect low paying jobs through artifical means.

Unfortunately their are many people in America who either focus too much effort and those that buy into this effort that artifically maintaining the status quo is better than expanding our economy through the use of specialization, better technology and invention.

Also, at the end of your scenario where "there is no competition", if prices rise high enough and returns on those goods and services improve, competition will then emerge and prices will fall. So in your scenario under a free market I see only a temporary "monopoly". Real monopolies today are generally created by protectionists government regulations (e.g. labor unions, major league baseball, and single payor healthcare systems).

Supply side economics is all about removing barriers to production (generally higher taxes, unreasonable regulations, and government sanctioned monopolies).

Since you mention a "law of economics" which I appreciate, I throw out one of my favorites:

The law of unintended consequences.- Human actions, and especially governmental acts, have consequences which were not intended and not anticipated by the actors.

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miwingman
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All I stated were universally accepted laws of supply and demand. Here are some text book definitions:

Market = A set of arrangements in which buyers and sellers are brought together through the price mechanism; the aggregate of possible buyers and sellers and the transactions between them. A gathering of people for the buying and selling of things; by extension, the people gathered for this purpose. In our case, we are talking about the entire world via globalization.

Three ingredients for successful market = Demand, Supply, Prices. We obviously have those three ingredients, we are just arguing what influences them and how to turn it in our favor.

Demand can exist without any way of being satisfied.

Supply can exist without any way of being consumed.

Four factors that create value = Utility (satisfy a want/need/desire), Desire, Effective buying power, and Scarcity. Self explanatory I think?

Equilibrium price = The price at which the amount willingly supplies and the amount willingly demanded are equal. The price at which supply is perfectly allocated. (usually only happens for a split second in time by the way, equilibrium is usually only maintained for sake of argument on a graph to explain a point)

Fundamental forces that govern demand: Employment, population, income. For example; a change in employment leads to a change in office jobs which leads to a change in demand for office space. Or a change in population leads to a change in households which leads to a change in housing units.

If you argue any of those concepts you better use the scientific method to argue it.

It is universally accepted by all economists via basic economic concepts that reducing the work force will increase wages. It has been proven hundreds of times throughout history. Give me a single example of where flooding the work force increased wages. Give me a single example of where increased population did not increase demand for a single thing. Give me a single example of where flooding the market did not reduce price. You are arguing against fundamental principles of economics.

As far as the build it you will come, you are confused. The demand for Halo 2 already existed before Halo 2 was even created. That might be confusing but let me make it simple.. if you build a house and there is 60% vacancy in housing units in your area already, you will not all of a sudden have less vacancy. The demand for housing will not increase just because more housing is built. It's another fundamental principle of economics. I don't want to spend too much time covering each of your points though honestly.

But one thing, there is no such thing as the law of unintended consequences in economics, that is an adage I am familiar with popularized by a sociologist I believe. It is a social concept, not an economic law.

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makuck
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Demand side economics? Who's making the demands?

Interesting perspective, miwingman, thanks. The baby analogy is fascinating, but not because I agree with a baby making demands on some capitalist economic paradigm, but because the baby exists within a socialist or even communist economic paradigm. I would hazard a guess that infant mortality would skyrocket if a baby's world was that of a capitalist system. However, in "developed countries" we know people are born into this world to toil for some master. Right?

"Developed" countries seem to be those that have embraced capitalism as an economic strategy. In its raw form capitalism disregards the individual in favor of greed. The capitalist is not ignorant about consequences of people revolting over injustice and inhumane social conditions, so capitalists manifest a system that sustains just enough economic distribution to the peasantry to assuage revolution. But the capitalist is always moving the bar of economic sustainability of the peasantry in a never ending quest for greater profit. It is unsustainable in the long term and inherently unjust from any social perspective.

The capitalist, finding that there is not enough money to go around for the peasants, concocts a scheme of debt, which creates servitude and ultimately an economic system that no longer sustains free men/women. Like miwingman's water distrubution illustration, life sustaining resources, either natural or manufactured, becomes the property of the capitalist. Is there anything left of free men/women in a society that compels participation in an economic structure that essentially enslaves it?

Capitalism is a terribly unjust economic paradigm. It has proven itself antithetical to a free society. Capitalism is also incompatible with Constitutional tenets and principles upon which American democracy was predicated - particularly those principles immortalized in the Declaration of Independence. One cannot tinker with capitalism. It has to be replaced.

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Continuing the water example.. If one company owned all the water, and all the water pipes, would that really be a free market? Would there really be any room for new competition to come in? To re-plumb an entire city just to do the same thing as the pre-existing pipes? Would an individual pay the $1000 it costs to attach a second line to their house just so they can have a choice in supplier? And even then is only 2 water suppliers really a free market? Would there be room for 3 water treatment plants, 3 full sets of pipes, main lines, and 3 sewers just so you could have a measly 3 companies competing?

Use that same example for gas, phone lines, roads, and electric. Even in grocery stores, you might see thousands of brands but they are all put there by about 3 companies. 99% of the corn grown in the U.S. is Monsanto patented round up ready corn. Even areas where you think there is competition there is actually not.

If basic things, I would call them the commons, were not regulated by the government or local municipalities it would almost certainly be exploited, as water is essential to life. Many water treatment facilities are already being privatized though if you can believe it or not.

Capitalism in my opinion caters to the idea everyone loves of infinite growth. The only problem being there isn't infinite space or resources, and much of our capitalistic growth comes from expending those things. Capitalism and all it's negative impacts wont change until we change our cultures paradigm. We can't have infinite water pipes, and infinite food, and infinite supply, and infinite demand, they are all in a framework set in stone by the laws of nature.. there is only so much air, so much water, so much oil, so much space.. what is the true price of those things when they begin to run out (in our lifetime)? Not the price we set today, but the price projected 50 years into the future. I think we are vastly underselling the true value of our environment.

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makuck
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Why is gas essential to life?

What mandates the need for a telephone?

Why does one need electricity?

How does one juxtapose water with the above?

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Dusty
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In its raw form capitalism disregards the individual in favor of greed.

Greed is a powerful human motivator, regardless of what economic system an individual happens to work within. The beauty of a reasonably regulated capitalist system is that it harnesses this powerful motivator for the betterment of all. That's not to say injustices do not occur but that is the exception not the rule.Capitalism is far from perfect but what other system has produced the same level of equality, prosperity and a comfortable way of life?

For a business to be successful it must provide a good or service to individuals at a price they are willing to pay. If they provide poor service, a poor product or are unable to produce a good at a price enough people are willing to pay they go out of business.It is the greedy pursuit of profits that drive business to meet the desires and demands of individuals that

People vote every day with their dollars, what could be more democratic then that?

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Gotitdone
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Sep. 21, 2010 12:11 pm

We can't have infinite water pipes, and infinite food, and infinite supply, and infinite demand, they are all in a framework set in stone by the laws of nature.. there is only so much air, so much water, so much oil, so much space.. what is the true price of those things when they begin to run out (in our lifetime)?

That is where capitalism shines. When the supply is less then the demand the price gos up leading to two things; the potential profit lead to people begin to research into how to create more supply or find an alternative to meet the demand and people begin to adjust their life style to reflect the lower supply. In each case greed is the motivating factor. The greedy producer wants the profit that comes from the higher prices and the greedy consumer wants to keep more of their money.

Gas prices is the best illustrator of this. When the price gos up greedy oil companies explore for new wells and research into how to get more from existing wells, motivated by the higher profit from each gallon of gas sold. Consumers adjust their lifestyle by carpooling, buying a more efficient vehicle or driving when only necessary, motivated by greed in not wanting to spend more money then they have to.

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Gotitdone
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Quote makuck:All I stated were universally accepted laws of supply and demand. Here are some text book definitions: ...

Agreed.

If you argue any of those concepts you better use the scientific method to argue it. It is universally accepted by all economists via basic economic concepts that reducing the work force will increase wages. It has been proven hundreds of times throughout history. Give me a single example of where flooding the work force increased wages. Give me a single example of where increased population did not increase demand for a single thing. Give me a single example of where flooding the market did not reduce price. You are arguing against fundamental principles of economics.

I never advocated "flooding the workforce" and I don't doubt the affect of supply and demand on the labor market it is just a moot point for me because there is nothing I can do, or would intentionaly do, in order to control the population.

I'm not sure, but from the sounds of some of your thoughts on the environment and natural resources, population control may be a favorite topic of yours. It seems to me that those types of theories could possiblly promote policies of war or extermination at worst, and a Logan's Run scenario at best. Forced retirement or barriers to participating in the work force because of age are not something I can support not only because it strips people of their liberty and are discriminatory, but also from an economic sense there are many older people who can run circles around younger laborers in the work force due to their experience.

Unless by "flooding the workforce" you are referring to immigration or visas and if that is the case then I misunderstood your post.

You are right, I'm not discussing the science of economics but rather economic policies and questioning the policy of demand side economic policy as presented by Riech and espoused by Thom and others. I'm not really looking to discuss the intersection of supply, demand, and some data point on a graph (as you said yourself) or other textbook theories (although scientifically proven and Nobel prize worthy).

I'm asking how these theories are applied in real-world scenarios with real actors. Many things look good on paper, but don't produce the expected results.

As far as the build it you will come, you are confused. The demand for Halo 2 already existed before Halo 2 was even created. That might be confusing but let me make it simple.. if you build a house and there is 60% vacancy in housing units in your area already, you will not all of a sudden have less vacancy. The demand for housing will not increase just because more housing is built. It's another fundamental principle of economics. I don't want to spend too much time covering each of your points though honestly.

But one thing, there is no such thing as the law of unintended consequences in economics, that is an adage I am familiar with popularized by a sociologist I believe. It is a social concept, not an economic law.

My reference to Halo 2 was low hanging fruit for you and I agree there was already demand for the sequel before the supply was available, but I don't think you could say the same for the original Halo, and more to the point was there a demand for gaming consoles before gaming consoles even existed?

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miwingman
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Quote makuck:Continuing the water example.. ...

Didn't mean to focus on water as I just used it in my example in lieu of using "widget" or "Product X". You can substitute any non-utility good or service and I believe my scenarios will still hold true to my original points (e.g. food, shelter/housing, clothing).

I can't help but to think of two words when reading your narrative of the water market being cornered after someone installs pipe and plumbing, etc. -- bottled water! (I know it is not a utility in the sense you were discussing water and it probably goes against your environmental senses, but is an example of someone selling water in a percevied monopolized water market.)

Capitalism in my opinion caters to the idea everyone loves of infinite growth. The only problem being there isn't infinite space or resources, and much of our capitalistic growth comes from expending those things. Capitalism and all it's negative impacts wont change until we change our cultures paradigm. We can't have infinite water pipes, and infinite food, and infinite supply, and infinite demand, they are all in a framework set in stone by the laws of nature.. there is only so much air, so much water, so much oil, so much space.. what is the true price of those things when they begin to run out (in our lifetime)? Not the price we set today, but the price projected 50 years into the future. I think we are vastly underselling the true value of our environment.

Scarcity creates necessity and necessity is the mother of invention.

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miwingman
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I was referencing population in regards to supply and demand, not exterminating the population. Not sure where you got that from. I wasn't referring to immigration or any real world application whatsoever only economic laws as stated by textbooks.

Again going back to Halo 2, yes there was demand for the original Halo and gaming consoles before gaming consoles ever existed. They were created for the purpose of filling that demand that was already there or the creators of them would not have taken the risk to create them. Why create a new product if there is absolutely no possibility that there is demand for it? For example, I bet there is demand for a $5 console system that is more powerful than any console system out today.. even though that type of console system does not exist I'd bet 1 million bucks there's demand for it. It does not matter if the supply is there or not. It's an extremely fundamental principle of economics.

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makuck
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As far as your second post, according to textbook definitions, scarcity is not directly tied to necessity like you suggest. Scarcity affects price. Necessity creates demand. If something is scarce and there is demand for it, scarcity will drive up price which will actually reduce demand so that particular market can reach a momentary equilibrium.

For example nuclear waste may be relatively scarce.. but that doesn't mean we need it! LOL

Necessity can bring about invention though, I will give you that one.

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makuck
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Mar. 31, 2010 10:13 pm

I don't have time to read through the debate here but the original post with scenario #2 history shows that what you actually get is some impresario exploiting the local population with their store. In some cases even cornering a commodity like water that was previously available for free. When the locals catch on they the impresario slips out of town and sets up shop elsewhere. It's sort of like 1800's snake oil salesmen (still around in more sophisticated fashion even in 21st century America).

E F Schumacker in a follow up to "Small is Beautiful" suggested that rather than foist technologies on cultures not ready for it that instead you provide intermediate technology. Not sure that is even necessary. There have been some quantum jumps in some countries even with computer technology made available to the populace. Some of these countries are probably using free wimax (basically wide area wifi). The impact of seeing what is happening in other companies helps them make a jump in their living standards.

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captbebops
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Quote makuck:I was referencing population in regards to supply and demand, not exterminating the population. Not sure where you got that from. I wasn't referring to immigration or any real world application whatsoever only economic laws as stated by textbooks. Again going back to Halo 2, yes there was demand for the original Halo and gaming consoles before gaming consoles ever existed. They were created for the purpose of filling that demand that was already there or the creators of them would not have taken the risk to create them. Why create a new product if there is absolutely no possibility that there is demand for it? For example, I bet there is demand for a $5 console system that is more powerful than any console system out today.. even though that type of console system does not exist I'd bet 1 million bucks there's demand for it. It does not matter if the supply is there or not. It's an extremely fundamental principle of economics.

How do you explain the millions of goods and services created throughout history that nobody wanted and as a result their producer went out of business? People have more failed "ideas" than successful "ideas". I would argue that capital is expended and goods are produced every day that in the end no one wants. It is called a failed business idea or strategy.

Also, I would argue that the demand for a high-end gaming console was already supplied by Sony's Play Station, but Microsoft "invented" (or supplied whichever one you choose) the Xbox and created "demand" for their product and a whole new market in the gaming industry? Therefore supply generated demand and through invention this happens every day as well.

Of course when consumers demand certain products supply is created and distributed, but my point is that "demand" does not always have to come before "supply" and that type of "supply" generates a lot of economic activity.

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miwingman
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Quote makuck:As far as your second post, according to textbook definitions, scarcity is not directly tied to necessity like you suggest. Scarcity affects price. Necessity creates demand. If something is scarce and there is demand for it, scarcity will drive up price which will actually reduce demand so that particular market can reach a momentary equilibrium. For example nuclear waste may be relatively scarce.. but that doesn't mean we need it! LOL Necessity can bring about invention though, I will give you that one.

Agreed. And that is why the invention of the nuclear waste commodity exchange has never really taken off! LOL

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miwingman
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How do you explain the millions of goods and services created throughout history that nobody wanted and as a result their producer went out of business?

Because there was no demand for the product created to begin with. That aligns with everything I said and every economic principle.

but Microsoft "invented" (or supplied whichever one you choose) the Xbox and created "demand" for their product and a whole new market in the gaming industry?

You are simply wrong and I suggest you read a book on economics so you know what you're talking about. I will give you yet another example. I will stick with your example of video games. Currently, on this day of Sept. 26, 2010, I can guarantee you there is demand for a first person shooter with good graphics, a good plot, and competitive online play. This unknown game will be released in one month. It sells millions of copies because it's a damn good game. Releasing this game did not create demand for it. People simply demand good games. Before the release of Halo, good first person shooters happened to be "scarce" enough that when Halo was released it picked up the totality of demand for good first person shooters. Understand yet?

Of course when consumers demand certain products supply is created

This too is wrong as well, for example there is no greater demand than eternal life and youth yet no company can supply a product that could meet that demand. Demand only has the possibility of stimulating supply. If there is no way supply can be stimulated then price will increase so demand is diminished as the supply/demand curve attempt to reach equilibrium.

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makuck
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Quote miwingman:
Quote makuck:I was referencing population in regards to supply and demand, not exterminating the population. Not sure where you got that from. I wasn't referring to immigration or any real world application whatsoever only economic laws as stated by textbooks. Again going back to Halo 2, yes there was demand for the original Halo and gaming consoles before gaming consoles ever existed. They were created for the purpose of filling that demand that was already there or the creators of them would not have taken the risk to create them. Why create a new product if there is absolutely no possibility that there is demand for it? For example, I bet there is demand for a $5 console system that is more powerful than any console system out today.. even though that type of console system does not exist I'd bet 1 million bucks there's demand for it. It does not matter if the supply is there or not. It's an extremely fundamental principle of economics.

How do you explain the millions of goods and services created throughout history that nobody wanted and as a result their producer went out of business? People have more failed "ideas" than successful "ideas". I would argue that capital is expended and goods are produced every day that in the end no one wants. It is called a failed business idea or strategy.

Also, I would argue that the demand for a high-end gaming console was already supplied by Sony's Play Station, but Microsoft "invented" (or supplied whichever one you choose) the Xbox and created "demand" for their product and a whole new market in the gaming industry? Therefore supply generated demand and through invention this happens every day as well.

Of course when consumers demand certain products supply is created and distributed, but my point is that "demand" does not always have to come before "supply" and that type of "supply" generates a lot of economic activity.

In a nation with consumer purchasing power, that can work. A co. may create or uncover a "wanting of a product". In Haiti or Chad, and that certainly wouldn't generate consumer demand (purchasing power). to buy the supply.

I doubt that supply of such products in Haiti or Chad would find much of a market. The primary concern is getting enough to eat or buying enough water to drink. Pretty basic stuff.

There is plenty of "demand" for bank loans to save homes from foreclosure, and not the purchasing power to go with it to pay them back.

Retired Monk - "Ideology is a disease"

polycarp2
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Jul. 31, 2007 4:01 pm

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Time to Rethink the War on Terror

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When Eric Holder eventually steps down as Attorney General, he will leave behind a complicated legacy, some of it tragic, like his decision not to prosecute Wall Street after the financial crisis, and his all-out war on whistleblowers like Edward Snowden.

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