Okay, welcome to the second in the series of lectures on Fundamentals of Economic Analysis, a Causal Realist approach.
This is on exchange money and demand.
And in fact, even with the Roberts and Crusoe scenario or model, we can see that all action is really exchanged.
What Robinson Crusoe is doing in, let's say, catching fish, is exchanging one set of circumstances, which he prefers less, for a set of circumstances that he prefers more.
And that set of circumstances that he prefers more is the fact that he can satisfy his hunger with the fish.
And in doing so, he gives up leisure, which he values lower.
Now that's true not just of Robinson Crusoe, but all of us in our daily lives, so if you're at home and you combine the ingredients to make a submarine sandwich, then you're doing so as an exchange.
You're exchanging, possibly sitting in front of the television, continuing to watch a program for something you prefer, and that is consuming the sub-sandwich.
We call this in economics autistic exchange, exchange with oneself, and we all engage in it.
But we're interested more generally in interpersonal exchange in economics because that's how prices are formed through interpersonal exchange.
And if I could get a water up here, someone can bring me water, a bottle of water, thank you.
Now, there's what we call a typology of interpersonal exchange, okay?
The basic two categories is that of voluntary exchange, or aggressive, or sometimes it's called invasive action.
Okay, or voluntary action and aggressive action, so there's two types of interpersonal action.
Under voluntary action, there's subcategories, one of which is voluntary exchange,
where you do something in return for a quid pro quo, where you spend money in order to get a Wall Street Journal, for example, or you spend money in order to get, let's say, an automobile.
Gift giving is another form of voluntary exchange, and both the recipient of the gift and the donor benefit, otherwise that wouldn't take place.
That is, the recipient prefers the situation where the donor, let's say, receives the $100 and uses it, to one in which he could use the $100 on any other purpose that he considers desirable.
Thank you, Peter.
And the recipient, on his or her part, could refuse the gift if it made them worse off.
If they accept the gift, if the gift-giving is consummated, then in fact both parties are better off than they were before.
Now let's get to the second category, and that is aggressive action.
Obviously murder, robbery, and so on are examples of aggressive action, where one person is a victim and is rendered worse off than he would have been without the act of the invader,
Now, in a very narrow sense, and a sense that isn't really one that is common, you can say that, well, the victim has a choice in some sense, that is, your money or your life, in the case of a robbery, so he gives up his money in order to prevent something happening to him that he considers of lower value that is losing his life, but that's really not the point, the point is that he's worse off than he would have been as a result of that intervention.
and it's coercive in the sense that the various alternatives open to him in disposing of those resources, let's say that were robbed, are closed off by coercion.
Now, there's another category of aggressive action and that is coerced exchange.
This is much more common than you would think. It obviously involves slavery, and slavery might be the prototype.
The slave is worse off as a result of his or her enslavement. However, the slave does get something in return.
The slave gets fed. The slave gets even medical care. The slave does get some return in kind for their services.
But, again, the slave is worse off, because the slave could have used their resources, their labor, for example, or his resources, to achieve an end that has a higher value.
In the same way, the taxpayer does receive some government services in exchange.
But again, those services are valued less than the taxes that he pays or he would have given that money voluntarily to the government.
And you can think of the slave in the same way.
The slave does receive something, but it's valued less than what he could have gotten for his labor.
And then, of course, conscription, eminent domain, even jury duty.
People are paid, in some sense, they're given something by the government in exchange for performing those, or in the activity that's involved in those things, and it's not a voluntary exchange, but it's a forced exchange.
So in the case of aggressive action or invasive action, there are not mutual benefits.
One person is the beneficiary, the other person is the victim, is rendered worse off as a result of the exchange.
Whereas under voluntary action, whether it's gift giving or an exchange of some type, there are mutual benefits.
Now there are preconditions of voluntary exchange. What is necessary for a voluntary exchange to take place?
Well, one is that there has to be what we call reverse valuation of the goods exchanged by the two parties.
That is, one party has to value the good that he's receiving or both parties have to value the good they're receiving greater than the good they're giving up.
So if, for example, I purchased the Wall Street Journal today for a dollar, I valued the Wall Street Journal more than a dollar, and the seller valued the one dollar they received more than the Wall Street Journal.
Okay, so one thing that that analysis does is to explode this fallacy that has existed for millennia, that the goods exchanged have equal value.
They do not. There's actually a double inequality of value.
Each person values what they're getting more highly than what they're giving up.
So there is no equality of value.
And that's one thing that's hidden by the fact that a money price is paid.
For example, national income accounting, we say that the car added $30,000 worth of value to GNP.
And the CD produced added $12 worth of value.
That was the price on the market.
And speaking in those terms obscures the fact of this double inequality of value.
And secondly, there must be, and this is common sense, knowledge of each other's existence.
Okay, right now we could have a double inequality of value for this water.
That is, somebody could value this water for more than $1.50 and I wouldn't be willing to give it up for,
or I'd be willing to give it up for less than $1.50, let's say for $1.
Yet, if for some reason we don't communicate on that, then in fact there is no exchange taking place.
So obviously you have to have knowledge of each other's existence, which is reasons for advertising and so on.
So that in both cases, to sum up, both parties, or in all voluntary exchanges, both parties demonstrably benefit.
That is, they both improve their welfare or utility ex ante, otherwise they would not have undertaken the exchange.
Another way of putting it is that both parties gain a psychic profit or expect to gain a psychic profit.
Now, as we said, because of uncertainty and error in judgment and forecasting, there can be cases and there are cases in which a person regrets an exchange that he or she made,
but it does not make it any less a voluntary exchange.
And it doesn't in any way contradict the fact
that both parties at the moment of the exchange
expected the benefit from it, okay.
So this is an ironclad universal immutable law of economics
that applies during all times and overall all places, okay.
That is that voluntary exchange yields mutual benefits.
Now let me just give you some examples in a diagram, just sort of a general example.
Okay, at the top there you see A's value scale.
A has a horse and wishes to trade the horse for a cow.
That is, rather, A has a cow and values the horse, which he does not have,
That's why I have it in parentheses, more than the cow.
And B has a reverse valuation, okay?
And B happens to have the horse,
but values the cow more highly.
So, given that that condition, precondition, is satisfied,
the exchange does take place, okay?
Each person gets something they value more
for something that they value less in exchange.
Now that applies, by the way, to international trade.
No difference, some imaginary boundary
between countries does not nullify this law of economics.
So if an American values a Toyota more than $25,000
and the Japanese seller values the $25,000
that he's receiving more than the Toyota,
then the exchange will take place
and will benefit both parties.
There is no national injury.
All exchange involves individuals
must be analyzed on the individual level.
and therefore we have mutual benefits, okay.
Now this is all, this general analysis is also true of sweatshops, of plasma clinics,
a lot of plasma clinics have set up on the Mexican, US-Mexican border
and you can give plasma evidently more frequently than you can give blood.
And so many Mexicans come and exchange their plasma for $25 or $50, whatever the payment is.
And there's been a big outcry that somehow the U.S. is in a sort of vampire relationship with Mexico,
that we're exploiting this third world country.
But in fact, the person, the donors are in fact benefiting.
There's a great movie I just saw a couple weeks ago called Teristas,
in which there's a Brazilian doctor, I don't want to give it away, but basically to get back at the U.S. and Western nations for their citizens going abroad and purchasing organs from other countries.
They're, of course, kidnapping tourists and then taking their organs out and giving them to the poor people, this took place in Brazil, okay, it's a cool movie.
Then there's a famous Twilight Zone episode, which is one of my favorite ones, where this rich woman who has been blind from a young age and lives in a penthouse in New York, so you know she's going to be the evil one in this, of course.
She lives in a penthouse in New York and all she wants to do is see the New York skyline at night.
She remembers it from when she was a young girl before she had gone blind and I don't know if it was her doorman or a cleaning person whose child was very sick and needed an expensive operation and offers to donate or to sell his eyes, this is before organ donations, this was probably made in the 60s, to sell his eyes to her but the catch is she's only going to be able to see for one day, one evening
And of course, on the way Rod Sterling Rice sees things, she's very clever, the operation is successful, and just an advantage being taken off, and that's the night of the blackout in New York in the 1960s, so she sees nothing, right, so how dare you purchase an organ, but of course it's mutually beneficial, and we'll talk more about organs and price controls in a later lecture, then there's a very good article on blackmail that was, now blackmail involves absolutely no
They're forced. That would be called extortion, where you would extort somebody. You would threaten if they don't give you the money in exchange for protection.
For example, when the mob or the so-called mafia move into an area, they tell the store owners that we will protect you, but you have to pay protection money.
Otherwise, your windows may get broken and so on. In fact, they'll break the windows if you don't pay the protection money.
But if you do, they will give you those services. They will keep other gangs out and so on.
That's extortion. I'm not talking about that. I'm talking about blackmail.
And the case I'm referring to is that of Bill Cosby when a young woman came forward a number of years ago.
And I think she has it for a million dollars. She was his love child. She was his child from a relationship with a woman.
And he had hidden it for many, many years. And of course, the police got involved and they arrested her and it came out.
He admitted to it. But the point is, if you look at blackmail, there's really two components, right? Neither of which are legal.
One is secret telling. If she had just gone to one of these tabloids, these supermarket tabloids, and told the secret, and they published it, she wouldn't get in trouble for that.
Okay, that's not against the law. On the other hand, there's an exchange of money.
Now, if Bill Crosby had found out about her and wanted to make sure that the secret was kept,
he could certainly go to her and not be arrested and offer to pay her a million dollars.
That's not blackmail and that's not against the law. However, put those two things together and it's suddenly illegal.
So it's very, very odd that two things that are perfectly legal, when they're done, when they're combined, are considered illegal.
Now, let's look at it economically. Walter Williams, as I said, wrote a very, very good column on this when this first broke,
in which he pointed out that, well, in fact, Bill Cosby is better off, if he does pay the money, he's certainly better off, and she's better off.
So there are mutual benefits to blackmail. There is no victim in the relationship, okay?
In fact, what if she... he offered her the million dollars and she turned it down and went public with it, okay?
Which is not against the law. He would actually be worse off in that case.
And an indirect effect, of course, of suppressing blackmail is that in the future the blackmailese will never have a choice, right?
So if the government stamps out all blackmail, then they don't have the choice to turn down a million dollars.
Or rather, to turn down the offer of not telling the secret for a million dollars.
So in the long run, the blackmail is actually rendered worse off by suppressing blackmail.
At least before that, he has a choice to say, yes, I'll pay, or no, I won't pay.
And she has every right to tell the secret, certainly.
It's combining the telling of the secret with the request for money that somehow becomes illegal.
But the reverse, of course, is not illegal.
The offer of money, not to tell the secret, it's not against the law, it's not blackmail.
And then there are many other, certainly pornography, whatever we think about it morally, is a voluntary exchange.
The feminist movement claims that somehow it's exploiting women, but again, they're using broad categories.
The individual women involved in those activities are certainly better off from their own point of view.
We're talking from a moral point of view than they would be if they worked as a waitress or in a factory or something.
Other women, of course, have the choice of turning that down and most of them do.
So, this analysis is a very, very broad range of application, and allows you to spot and to refute many fallacies.
In the case of forced exchanges, again, slavery, taxation, eminent domain, conscription, only one party gains,
and that is the person who is able to enforce those forced exchanges and that's in this particular case the government.
Paying for public schools, being forced to pay for what you may not wish to, that is that you value the money more in spending it on private schools than you do in public schools.
Your push, your level of welfare is reduced below what it would have been if you weren't forced to make that exchange.
Now let's get to the law of marginal utility and how it plays into the limits of exchange, into limiting exchange.
And what we're interested in now is when two parties possess not just one unit each of a good, but multiple units of a good, okay?
How many exchanges are made? How many units are exchanged? And the law of marginal utility allows us to determine that, okay?
Basically, where there are no more mutual benefits, the process of exchange stops.
Even if one party wishes it to go on, and the other party has reached the limit,
where he no longer values an additional unit of the good that he's receiving above what he's giving up, the exchange stops.
So let me just show you that here, it's sort of straightforward.
Let's say you have a situation where one farmer possesses no horses with a supply of zero horses and four cows.
And the second farmer possesses four horses but no cows.
And those are their value scales.
Now, the animal that's in parentheses are units of the good that they do not possess.
So A possesses zero horses, so we have the horses in parentheses.
They can still value them because they're able to exchange, so they value these units that they will receive in exchange.
So what exchanges are made? How many horses and cows are exchanged?
Well, two exchanges are made. We're assuming what's going to be explained tomorrow.
We're assuming that the prices or the ratio of exchange is one horse for one cow.
But the law of marginal utility will also explain why that is the price.
But for now, let's assume that.
Certainly then, if you look at the fourth cow on A's value scale, we'll do it from A's point of view,
he values that much less than the first horse which he doesn't possess, which if you notice in parentheses is far above it.
So he exchanges his fourth cow for the first horse.
B will give up the lowest ranked horse on his value scale, so the fourth horse is certainly below the first cow that he receives.
So that exchange takes place, because the marginal utility of the horse is below the marginal utility on B's value scale of the first cow.
And what about the second exchange? Well, if you go up and see the third cow on A's value scale, and that's what he possesses, that ranks below the second horse.
Let's call the second horse. You see the second horse, which he does not possess yet, because he hasn't made the second exchange?
That's above the third cow. So he makes that exchange also.
Now, will he exchange any further? He now has two cows and two horses.
If he wanted a third horse, he'd have to give up cow number three there, which ranks above the horse. He'd be worse off.
That's where the exchange stops, okay?
The exchange stops when the marginal utility of the good that he has to give up, and that's the third cow,
is above the marginal utility of the good that he would receive in the exchange.
So he's perfectly satisfied now with the supply of two horses, two cows.
B, on the other hand, would like the exchange to go further because B ranks the third cow,
Let's put that third cow on B's value scale above the horse that he'd be receiving in exchange, okay?
So he'd be receiving the third horse there. Notice he ranks the third cow above that.
But that exchange cannot take place now without injuring A.
So unless B put a gun to A's head and made it a coerced exchange, the exchange process stops.
We say in economics that the mutual gains from exchange are exhausted at that point, okay?
That's all very theoretical, so let me give you an example, more up to date.
This is a copy or representation of what I bought at Wal-Mart.
Not this year, last year, I was going to photocopy this year's, but I was too lazy.
When I went to Walmart, I had a stock of money, and I didn't have many of these other things, or I didn't have enough of these other things compared to the money.
So I bought a George Foreman grill at Walmart, because I valued it above the price of 1944. These are the actual prices I paid back then.
I bought three CDs. I bought a CD there for $9.72. Actually, I bought three CDs, but I didn't buy any more than that.
No, actually, I bought one CD. I bought three DVDs, because I valued the three DVDs that were on sale more than the $4.88.
I bought only four ounces of Sensodyne toothpaste because I didn't value any more than that above the per unit price.
I bought a pound of Folgers coffee and just one pound, no more, and I bought a pound of bananas.
Why didn't I buy the second pound of bananas for 48 cents?
Because I ranked the 48 cents above the second pound of bananas.
Why didn't I buy a fourth CD? Because I ranked the $4.88 above the DVD.
Everyone then who makes an exchange at any given moment in time will walk out of the store as I did having exhausted the gains from exchange.
I could not have made myself any better off by buying anything else, by reducing my stock of money.
Now, as I continued to spend money at Walmart, what happened to the marginal utility of money? It went up.
The marginal utility of these various things went down.
Now, there are many things that I passed by in the aisle, in the various aisles.
I didn't buy any beer, I didn't buy any butter, and so on.
Why didn't I? In a general sense, not specifically for me.
Because even the first unit of those goods was below the marginal utility of the price that I would have had to pay.
So when someone, you see someone with a full shopping cart walking out of a store,
They are in what we call in economics sort of a personal equilibrium or what Mises called a plain state of rest, okay?
That is, there are no more gains to be made from exchange and that's true of everyone who walked out of Walmart that day.
Okay, let's assume prices are fixed during the course of the day and we'll change the prices the next day.
Walmart, on the other hand, they could have and probably would have liked to sell more at those prices,
But no one would have purchased more at those prices.
So Walmart, in order to have sold more, would have had to do what with its prices?
Lower them, okay?
But they did not do that because they valued the remaining stock of inventory that's in the store above the lowered prices.
Basically, they speculated that the next day they could sell more of those goods at the given prices that they fixed.
Now, they might have sales the next day, realize that they have too much stock on hand.
but that's another story okay so again this is called everyone when they when
they go through the exchange processes every moment in time ends up in what we
call a momentary equilibrium or a plane state of rest okay those are the terms
that that are used in economics or in the causal realistic approach okay so it
It would be incorrect to say that anyone walked out of the store frustrated.
They might be frustrated that the price was higher than they thought it would be, but
no one walked out of the store worse than when they walked in, and everyone who bought
something walked out better off.
A person who walked out without anything, it turns out that the marginal utility of
the price of anything was above the marginal utility of what they could have gotten, that
they would have had to take something for a lower value and given up something of a higher value, okay?
Now, they may have shopped around, they may have done that because they were shopping around and thought they could get a lower price.
They might come back later in the day or the next day and buy at that price.
But at that moment, that was their judgment and that's very, very important, okay?
So at the end of every market, let's call it a market day, so at the end of every market day, all possessors of the good value the last unit purchased above the price, and they value the price above the first unit that they do not purchase.
So if you buy two six-packs of beer, that means that you value the second six-pack above, let's say, the $6 price, but you value the $6, the additional $6 that you would have to give up, above the third six-pack.
So I'm laboring this point because I want you to see that in the market economy, when left to its own devices, everyone seeks out and exploits fully the mutual benefits of exchange.
That's not to say, again, that due to uncertainty, error, lack of judgment, they may not later either regret a purchase they did make or regret a purchase that they did not make, because they thought the price would be lower somewhere else.
Now let's get to, so that's basically the analysis of exchange.
Exchange, and I'm going to talk about this very, very briefly, results from really a division of labor and specialization.
It implies, especially in a market economy, we all have a job in a very small area of one production process.
In a modern economy, no one specializes in a complete production process.
If you've ever read the article by Leonard Reed, iPencil, it shows how many different producers, specialists, throughout the world are involved in the production of something as simple as a pencil, and a pencil back in the 1950s, okay?
So everyone is a specialist to some degree when exchange begins, and that results in a division of labor, okay?
As you recognize that you can get more and more of your wants fulfilled through exchange with other specialists, that is, as the size of the market grows, you specialize more narrowly because you know it will be easier to find people who will want the things that you purchase.
We'll talk more about this when we talk about money.
Eventually everyone, and that's today certainly, we're at that point, everyone produces for the markets and satisfies his own wants by exchanging his product for a variety of other goods produced by other specialists.
Actually it continues to go forward. Daycare was unheard of as a paid-for service outside the home in the 1950s, almost unheard of.
I'm not talking about just occasional babysitting, I'm talking about full-time daycare, okay, and purchasing fully cooked meals and having them delivered, you know, that was unheard of, okay, so cooking has been specialized in and so on, so even though the Division of Labor is always finding new areas for specialization and exploits them due to the entrepreneurial profit motive, okay, now what facilitates this extension of the Division of Labor and intensification of it is the fact that
We have a medium of exchange, which is money.
Now, the biggest mistake in thinking about monetary problems and about money itself
is in thinking that money is either something more or something less than a commodity.
Money is a commodity, like all other commodities.
It has one characteristic that differentiates it from all other commodities in degree,
and that becomes a difference in kind, in a sense,
and that is the fact that it's acceptable routinely and universally.
You can go anywhere with the U.S. dollar, certainly in the United States, or a U.S. bank deposit of U.S. dollars, and purchase whatever you need.
So everyone accepts the dollar, and that allows for many benefits in terms of efficiency in the economy, which again we'll talk about when we get to money.
So what we're going to accept now is that all prices are money prices in the modern economy and a price is simply a ratio of exchange between two different commodities.
Money indeed is a commodity, even fiat money, because people accept it in exchange for valuable things.
Now, in the case of fiat money, though, it's monopolized by a central agency and therefore it's inefficient and can be destructive.
which brings us then to supply and demand
let me just talk about the law of demand which I'm sure you all
are familiar with
been exposed to
now the law of demand tells us simply that the lower the price of the good
the greater the quantity demanded
when we say quantity demanded we simply mean the amount that buyers
are willing to purchase. So we would state that the lower the price of a good,
the greater the quantity demanded,
all other things equal, meaning the price of other goods equal, incomes equal, and so on.
And it has a converse statement. Conversely, the higher the price of a good,
the smaller the quantity demanded, all other things equal.
And the real world really abounds with illustrations, not proof, but illustrations of this law.
In 1978,
The price of a computer was three million dollars, it was a computer that was slower and could perform fewer functions than your basic PC today.
Now what happened is the price of computing power has fallen so drastically.
The law of demand kicked in and people who would have never dreamed of having a computer in their house in 1978, now might have three computers in their home.
The Law of Demand is illustrated in that case. Cell phones, when they first came out, I don't know, maybe back in the 70s, they were called modular phones or car phones.
They're extremely expensive, only rich Hollywood types had them. You saw them sometimes in movies. James Bond had one, you know, in the 70s, but none of us had them because they were so expensive.
As the price has come down, they've been purchased almost universally.
Let me give you an interesting example.
Ballpoint pens, when they first were introduced at Gimbals in New York, which was a competitor of Mises in 1946, they were $20.
Now $20 in 1946 is over $100.
So, not many people have ballpoint pens, but there was a tremendous amount of competition and by 1948, 1949, the price had come down to something like 20 cents a pen.
Again, that's over a dollar or whatever. And people who were still using fountain pens between 1946 and 1948, more and more began to turn to ballpoint pens.
And then obviously when the price of oil went up and therefore the price of gasoline, we had a tremendous revolution in the way Americans drove.
We were told that in 1973 when we were waiting on gasoline lines, and then again in 1979, during the Iranian Revolution and the Iraq-Iran War,
and the interruption of oil supplies, we were told that Americans better get used to waiting on these lines until the end of the century or through the next century.
And, of course, there were price controls, and we'll talk about that, but as soon as price controls were taken off and the price rose for gasoline, those lines disappeared.
And in the 1980s, the auto industry was revolutionized.
GM, Chrysler, Ford were driven to the brink of bankruptcy.
Actually, Chrysler was in bankruptcy and the government bailed them out with taxpayer money, rather with insuring loans with taxpayer money.
And Americans began to drive much smaller cars and the Japanese companies that marketed them did extremely well during the 1980s.
The price of oil collapsed in 1986 and stayed low into the 90s and we got the law of demand working in reverse.
That is, the demand for gasoline went up because people began to want SUVs.
So as oil became cheaper, and therefore gasoline became cheaper, law of demand operated,
so people were willing to buy greater and greater amounts of gasoline, okay?
And the way you do that is by buying larger cars, okay?
And so SUVs then became popular.
Now with gasoline prices going up again, and I don't know how much of this is a market phenomenon,
we have hybrid cars as a way of economizing on the higher-priced gasoline that's just beginning to take hold,
But again, I haven't done a close study of that, so I don't know if that's a government-driven phenomenon.
I suspect it is, but I just think smaller cars would be sufficient to most people.
Okay, now let me just talk a bit about a demand schedule.
It's a table that indicates the quantity demanded of the good at different prices.
And it's just an illustration of the law of demand. It's not meant to be anything real.
We never see a demand curve, as I'll talk about, in the real world.
The only thing we see is one point on a demand curve, because all we see is a certain amount, quantity exchange, for a given price.
So in this case, this is the price, we use milk, this is the price per gallon of milk, and we can think of this in quantity demanded, a million dollars, a million gallons per day, let's say, in the US or a particular state.
I don't know, I don't have an idea of the magnitude of milk consumed in the US.
But in any case, all that's important about this is that all of the things given, the lower the price is in a given situation, the more that people will demand, the greater the quantity demanded.
So as price falls, quantity moves inversely, and as price rises, quantity moves again inversely, decreases as price rises.
Now, that's useful for teaching introductory students about economics, okay?
This, and you could probably just get away with using demand schedules, but economists moved into curves.
And again, it's a nice representation of the law of demand, but the problem is curves more than schedules.
The schedules deal with discrete units that people, that real action deals with, okay?
Once you draw a continuous curve, of course, it means that the units are infinitely small.
And there is no concept of infinity or there's no use for the concept of infinity in human action, in understanding human action.
There is an understanding part of the natural world, but certainly not in understanding human action.
So that the demand curve is a graphical representation of the demand schedule and so therefore it's redundant in some sense.
But you can do certain things with it in a very economical way, and it's easy to see certain laws illustrated by the demand curve.
So, interestingly, from about the 1920s until when they first began to be drawn regularly, until the early 1940s, all demand curves were inexplicably drawn as rectangular hyperbolas.
I got that from Murray Rothbard, I hadn't realized that, and that's the middle demand curve, rectangular hyperbola.
Basically, what that would tell you is that people spend the same sum of money on the product regardless of how high or how low the price is.
And as I'll show you, this is inconsistent with praxeology.
Now, eventually, with George Stigler's, and George Stigler was Murray Rothbard's teacher in micro,
with George Stigler's textbook coming out in the 1940s, late 30s, early 40s, he started to draw them as linear curves.
Okay, and linear curve is easier to work with, it's slightly more meaningful, okay, and it's just, in essence, it's simply easier to use.
What that tells us is that at very high prices, the amount of coffee that we purchase is extremely low, so if you got as high as a thousand dollars per pound of coffee,
Even my wife, who has to have her frozen colada from Dunkin' Donuts every day, would swear off of coffee.
And then as the price drops, notice that the quantity demanded on the horizontal axis will increase.
So the demand curve is always downward sloping to the right.
That's one thing that we know. It's downward sloping to the right, simply meaning that lower the price, greater the quantity.
So it has a negative slope, okay?
Now, actual demand curves in the real world are not smooth, they're not even linear, okay?
An actual demand curve, as Boehm-Bawerk first pointed out,
is jagged and it's discontinuous, deals with discrete units.
This tells us that at $10 per gallon of gasoline,
There might only be three million gallons of gasoline consumed per month in the U.S.
And as the price drops, price itself, even the monetary unit is indivisible, is lumpy,
and quantities of gasoline are lumpy.
They're not, they can't be changed by tiny amounts.
That's why the curve can't be continuous.
So there are gaps in the demand curve and the demand curve is not necessarily linear, okay?
So the real world is lumpy, okay? Even money is lumpy on some level, okay?
It can't be continuously changed, okay, in infinitely small amounts,
which is what the linear and continuous demand curve tells us.
So we don't use that to teach undergraduates. I mean, it's good to keep that in mind.
You can use a linear demand curve as long as you recognize its limitations, okay?
So now let's say a few things about the slope of the demand curve.
First, the demand curve always slopes down to the left because for two reasons.
The law of marginal utility and differences in people's value scales.
Now, what I mean is this.
These have been fellows at the Mises Institute, Nick's here as a fellow.
Let's say that the price of milk starts, this is Nick's value scale, price of milk starts out at $10.
And this is the monthly consumption or weekly consumption of milk by these people.
Well, Nick at $10 would only buy one gallon, right, because he values $10 above the second gallon, third gallon, so on, they have lower value.
Mila would not buy a gallon of milk at $10, okay?
But as prices drop, the law of marginal utility kicks in.
That is, the second gallon, which has a lower value to Nick,
once the price falls to $7, he'll buy two gallons of milk, because he values the second one above $7.
And if it falls even further to $4 per gallon, he'll buy three gallons.
And if it's $2, then he's willing to purchase the four gallons,
4 gallons because the fourth gallon has a higher marginal utility than the $2. So you have, on the one hand, as the price of, let's say, hand calculators when they came introduced by Texas Instruments in the late 60s,
I remember there were $350 and very few people had them. Most people on college campuses and in high schools walked around with those slide rules.
The younger people here have probably never seen.
And depending on how you carried it and what location, determine whether you were cool or not.
I always carried mine in my back pocket. That was cool.
I cracked a lot of them and I got in trouble with my parents.
But if you carry them in here in your pocket protector, you weren't a cool person.
So anyway, as the price came down, though, from $3.50 today to $5, everyone has them.
When they were $350, only businesses had them and some rich kids.
So, but also at lower prices, people who would have never purchased a gallon of milk or a hand calculator at the higher price, now come in.
So if the price is three dollars, that's when the person who has a lower, ranks milk lower on her value scale, will begin to purchase, right?
So the point is that as price falls and people who buy nothing at the higher price begin to purchase, okay?
So what you get then, if you add, if these people are sort of proxies for society, you add horizontally everybody's quantity purchased or quantity demanded at any given price to get the total market demand curve or demand schedule, the price and the last column which is the total.
So, at one dollar together, Mila and Nick would buy six gallons, at two dollars they'd buy five, okay, that would be the market demand, okay.
So, now let me go back to talking about the slopes of the demand curve, or the elasticity, okay.
Okay, now the concept of elasticity of demand is badly named.
It should be sensitivity of demand or responsiveness of demand,
but Alfred Marshall called it the elasticity of demand then
because it was very influential, that name caught on.
Basically, it tells us how responsive buyers are to a change in price.
That's what elasticity of demand means, okay?
Now, keep in mind the law of demand tells us, and tells business decision makers in particular,
that at lower prices, more is purchased than at higher prices.
But they are also interested in how much more will be purchased if they cut their price by 10% or 5%, okay?
Or if they raise their price.
Because depending on how responsive demand is, if you cut your price you can actually increase your total revenue.
On the other hand, if you raise your price, you may very well reduce your total revenue.
So, for example, let me just write on this.
If, let's say, a GM is, let's say it's Cadillac, the CTS model, Cadillac is selling very slowly,
very slowly and they decide to cut the price by 10% so the percent change in price so their contemplates minus 10% cut okay if they expect that that will increase sales sales as a result of that cut of 10% in price will will go up that is quantity demanded will go up by 30% then that would will
will increase their total revenue, and they would do that, assuming that there's no additional cost involved, that the units are already on the lot.
On the other hand, what may happen is that this percent change in quantity demanded might only increase by 2%.
If it increases by 30%, we say that the demand for this model is highly elastic.
If it increases only by 2%, we say it's inelastic, meaning unresponsive.
Now, we're not really interested. Now, in economics, there is, let me see, I think I do have the slide for it, yeah.
There's a definite, there are two types of elasticities of demand.
What is called point elasticity? That is, what is the change, what is the ratio of change between price and quantity demanded at one point on the demand curve?
That's totally useless information for the businessman. So the causal realist economist would just ignore point elasticity of demand.
ARC elasticity of demand says, what if there's a discrete cut in price, what will happen to the quantity demanded?
In economics lingo, we are only interested in the ARC elasticity of demand.
And we're not even interested in that formula that I wrote up there, that's the formula for ARC elasticity of demand.
It's basically the percent change in quantity demanded over the percent change in price.
price and just to give you an idea before when I said that price is cut by 10% and quantity demand goes up by 30% that would be 3 divided by 10% that would give you an absolute number of negative 3 or rather a number of negative 3 anything above and we take and we take the absolute value so we take out the negative sign so anything above 1 an absolute value means that
It's very elastic, meaning that the numerator exceeds the denominator.
That is, the change in quantity demanded is greater than the change percent change in price.
And the reverse is that it's inelastic.
But you don't have to worry about that.
What's important is this.
What happens to total revenue when there's a change in price?
Now let's look at this. I use this example from my
students at Pace University in New York City because there is a
a hot dog vendor right outside pace
and he has to decide on how much to charge for his hot dogs
well let's look at this for a moment let's say that he is currently
charging two dollars and he's selling
ninety hot dogs per day
well if you multiply two dollars
per hot dog by the ninety he sells well his total revenue is one hundred and eighty
Is it in his interest to raise the price?
Well, yes it is in fact, okay?
Because at least in a certain range of prices, it's very elastic.
That is, I'm sorry, it's very inelastic.
People aren't very responsive.
If you raise the price from $2 to $3, yes, people cut back according to law of demand.
They cut back by 10 hot dogs, okay?
But you've raised the price by 50%, okay?
So you've raised the price to $3.
So $3 per hot dog times 80 gives you $240.
Now, the range of the demand schedule, the demand curve, where an increase in price,
when you raise the price, you get greater total revenue, that's called an elastic.
People aren't very responsive.
They cut back, but not enough to cause your total revenue to fall.
This hot dog vendor, if he's profit motivated, would not charge a price less than what?
Even at five, he could do better by, okay, now why would he do that? Well, look at the profit equation I drew, I put up there.
Profit is simply the profit, which I symbolize as pi, the Greek letter pi, because we use P for price.
Pi is equal to total revenue minus total cost, okay?
So, notice what's happening. Even at five dollars, if he raised the price to six, his total revenue doesn't change.
But what happens to his total cost? Well, he has to buy how many fewer hot dogs?
10 Fewer Hot Dogs, so his total costs are going down, so his profits go up, okay?
And at any price below $5, he raises his price, increases his total revenue,
and because he has to sell a few units, it cuts back on his total cost, okay?
So he will sell at a price of $6 or above, okay, in the elastic range,
because above $6, as he increases his price, what happens with total revenue? It drops.
Now, does he want to maximize his total revenue, assuming he has an ongoing business?
No, what happens is that, depending on its cost, which we're not going to deal with,
he will set his price somewhere between six and ten dollars, or possibly even higher.
His interest is not in the highest total revenue, but in the greatest gap between his outlays,
which is his total cost, or total money expenses more properly, and his total revenue.
Now, that is a linear demand curve, a downward sloping demand curve, as we'll see in a moment, in the real world, as I pointed out, that doesn't necessarily exist.
But let's look at elasticity and the relationship between a change in price and a change in total revenue.
So, to sum up what we said, you are in an elastic area of your demand curve when, if you cut your price, your total revenue goes up.
That is, people, when you cut your price, they raise their quantity, they increase their quantity.
Even though price is falling, they increase the quantity by more in percent terms when price is falling and therefore they get an increase in total revenue.
On the other hand, if you go the same way, that's between six and ten, if you go the opposite way and raise the price in that area, you'll find your total revenue falls.
If you're in a unit elastic area between five and six dollars, notice what happens.
Even though you raise your price from five to six dollars, people buy less, but your total revenue is unchanged, which means that the percent change in price is exactly equal to the percent change in quantity.
They offset one another, so it's no effect on total revenue, because total revenue is price times the quantity.
Finally, in the inelastic range, which is the low prices, on a linear demand curve, the inelastic range of the demand curve is always the lower half.
In that case, if you raise your price, every time you raise your price, you get greater total revenue.
Now, it's economically wasteful and counterproductive to ever set your price knowingly in an inelastic portion of your demand curve.
You will always tend to set it at a point at which, if you raise it further, what has to happen to your total revenue?
It has to fall, okay?
If you don't do that, then you are not maximizing your profit.
Okay, now, let me give you some rules about the relationship between the slope of the demand curve
and its Responsiveness or Elasticity.
The first is this, that all other things equal, the flatter the demand curve is, the more elastic it is.
So here's an example of a demand curve. Notice that at a price of $8,
And you can see the dotted line, the broken line that drops right from that point where the demand curve is at $8, down to 10,000 units, okay, that's in 10,000 units, so at $8, consumers, buyers will purchase 10,000 units.
Now, let's say that's a big store selling DVDs, and they're deciding, should we cut our price from 8 to 5, should we run a sale, or let's say CDs, should we run a sale, should we cut the price?
Well, if they cut it to $5 and the demand curve looks like DI, they only increase their quantity by $2,000,000, and their total revenue will fall.
However, when the demand curve is flatter, it indicates what? There's a much greater increase in the quantity demanded for every unit decrease in price.
So, in which case are they more likely to cut their price, where their demand is more elastic, where people are more responsive to lower prices.
And this is one thing that's very important. People complain about brand name competition.
But if there was simply one seller of bread, that seller would be able to charge a very high price.
a very high price. The fact that we have a lot of different brands of bread,
and let me go back a step, why would they have very high price when you
have one brand of bread? Well, it's not because it's a monopoly, the demand
for bread is, it is partially, the demand for bread is very, very inelastic, okay?
That is to say, even at higher prices, okay, if it's all the bread we're talking
about, all kinds of bread, even at higher prices, people will cut back much. However,
However, if you have different brands of bread, then what you have is each particular seller, if they raise their price, they'll lose a lot of their customers to some other seller.
So it's the fact that we have a lot of competing brands that keeps everybody's demand curve very elastic and allows them to cut their prices or it makes it more profitable for them to keep their prices low.
I'll come back to that with some examples.
The other thing I want to mention is the shapes of the demand curves in general.
What is realistic and what is not realistic?
First look at this particular demand curve.
That is, it's a perfectly vertical demand curve.
We call it perfectly inelastic because no matter how high you raise the price, will
people change the amount they purchase?
No, they're going to purchase the exact same amount.
People often talk as if the demand for gasoline, the demand for various food items, the demand that people are addicted to, is perfectly inelastic.
That's not true. If it was really perfectly inelastic, what that tells us is that as price goes up, people will never cut back.
Even, let's say, let's take cigarettes, let's say cigarettes are $10,000 a pack, people would still, because that line goes up to infinity, people would still buy the same amount.
It implies then that people would spend an infinite amount of income on buying the same amount of a good as the price rose.
That does not exist. That's the extreme case. What that shows you is that the steeper the demand curve is, the less responsive people are.
But in real action, people are always responsive. They're always willing to substitute something else for the good that's rising in price.
Now, there may not be good substitutes around, as in the case of gasoline, so the demand might be very elastic.
People cut back a little bit when there's a great percentage increase in price, but it's still very inelastic.
Take the other extreme case in the corner here, bottom corner, where the demand curve is completely horizontal.
In that particular case, supposedly, in economics textbooks, you'll find that being supposedly the case for a small wheat farmer in Iowa or wherever wheat is grown.
What that tells us is the following, that this firm, let's say this farm, can sell as much wheat as it wants, which is such a small part of the market, at the same price of $4.
$4 that is no matter how large they grow because again this is infinitely elastic
okay if they try to charge $4.01 no one will buy that wheat okay why these are
many many other farmers throughout the world selling me to $4 so they could go
theoretically from selling an infinite amount at $4 to selling nothing that's
highly elastic that's perfectly elastic okay what's important about real life
The important objection or problem with this demand curve is that philosophically all demand curves must slope downward.
That is, that farmer could get big enough as he continues to increase the quantity that his quantity produced will have an effect on the market price.
We'll drive it down a little bit.
And, in fact, I was making this argument once before in a lecture here.
We had two farmers who had raised wheat in Texas.
And they said, this is not even nearly true of wheat farming,
because in a given area, when the silos begin to get full and someone increases the amount of wheat produced,
One or two big farmers in the area, they will drive down the price by a penny or two per bushel of wheat.
So this is absolutely not true, and this is the basis, by the way, of perfect competition models that you'll see in the textbooks.
Again, what it does is it gives us an extreme case, but the flatter the demand curve is, the more responsive people are.
So, if this farmer raises the price by one cent, even his mother won't buy from him, okay?
He loses all, at four is one cent, there is zero purchase, okay?
Now, let's look at a couple of other demand curves, very briefly here.
The one here, that, see, economists, because it's easy in terms of mathematics to deal with what's called constant elasticity demand curves,
That demand curve in the upper right-hand corner is an inelastic demand curve throughout its whole range.
No demand curve can be that way, because that tells us that no matter where he is on this demand curve,
he can always raise his price and gain more total revenue.
So that implies infinity, that the higher the price is on this constantly inelastic demand curve,
The higher the price is, the more income people will spend, up into infinity.
They'll cut back on the amount they're buying, but not enough to reduce his total revenues.
And then we have the opposite, which is kind of ridiculous, the one in the bottom left-hand corner there.
Notice how flat that is. That has a constant elasticity that's greater than one.
And that means that no matter how low the price is, as the price falls, people will spend more and more income on that good.
That never reaches the zero price. It's going to continue, price is going to drop towards zero, and people at every lower price will buy more and more.
So that they're going to spend, again, possibly an infinite amount of income on that.
Okay, none of those demand curves, none of these, any of these demand curves are true representations of the demand curves in the real world, okay.
In the real world, demand curves are downward sloping, they're discontinuous, they're jagged, okay.
At any given point, people will spend a certain amount, okay, and as price falls, they'll spend greater than that amount,
But eventually, even at a zero price, people, or rather, eventually, as you push the price down, people are going to start to spend less on it.
And as you push the price up, people begin to spend less on it.
Okay, so as you continue to push the price up, you're going to find that eventually the demand curve meets, has to meet the price axis.
That is, the quantity demanded has to fall to zero, okay?
So at $10,000 per pack of cigarettes, demand for cigarettes, quantity demand, it would fall to zero, okay?
People would find substitutes and use substitutes, okay?
Now I'm going to say a few words and then I'll give some examples about what causes the demand curve.
This is what's really important.
Not the shapes of the demand curves, but how changes in prices affect total revenue.
That's what's really important, because that's what business decision makers are vitally interested in.
They're also interested in the reasons that may exist for causing people to be more or less responsive to changes in prices.
So let's talk about them. The first is the greater availability of close substitutes.
The greater the availability of close substitutes, the more responsive demand is, or the more elastic demand is for given good.
Let's take a simple example, step by step.
Let's say you have Coca-Cola at the local Winn-Dixie.
If they raise the price by 10% of Coca-Cola at the local Winn-Dixie,
what's going to happen to their total revenue?
It's going to decline because there are not only many other Winn-Dixies,
there are many other outlets where Coca-Cola is sold.
So that prevents them from raising their price very much, an individual seller.
What about Coca-Cola in general?
Coca-Cola in general. Well, if Coke raises its prices, so if the whole price of Coca-Cola goes up, there are still other brands.
Not only are there other types of colas, but there's also other types of carbonated beverages, and there's other types of soft drinks that aren't carbonated.
So we have a wide range of substitutes to choose from. Once again, it's very difficult, even for Coca-Cola, as big as it is, to raise the price of its brand.
They can do so, they're going to lose a lot of customers, right?
And then, of course, what if all carbonated soft drinks were raised?
Well, then the demand curve becomes more inelastic, that is, people are less responsive.
People will shift to other soft drinks, but more and more people will pay the higher prices.
So the demand curve becomes less elastic, meaning that that higher price for all carbonated beverages
beverages will result in higher total revenue, or may result in higher total revenue.
And then finally, let's say that all drinks that are soft drinks rise in price.
That's almost like the price of gasoline going up in a sense that there are not good alternatives.
There's alcoholic beverages and there's water.
So that demand curve is going to be more inelastic.
So if you had a monopoly of all soft drinks in the United States given a Coca-Cola,
do you think we'd be paying $1 a can or $1.50 a can?
No, we'd be paying $5, $10, because the demand curve for all soft drinks is very inelastic.
So the lesson is, that is, there's not good available substitutes.
You have coffee, tea, milk, and you have water, and that's about it, okay, and alcoholic beverages, all right.
You can't turn, as in the case of just one Winn-Dixie raising the price of Coca-Cola,
where there are thousands and thousands of available substitutes in terms of location, brand, type of carbonated beverage, and so on, okay.
The same thing, you go through that experiment with one model of car, the Ford Taurus, just that price rose.
Well, people have a lot of available substitutes. It's very difficult to raise the price very much for one brand.
But if Ford raised the price of all models, then it would be a little bit narrower, the range of substitutes.
If all U.S. automakers raise their, let's say all unions went on strike, union of auto workers, United Auto Workers went on strike,
In that case, then, the price of all U.S. cars would go up, then your only alternative would be what? Imports.
In fact, there's a very interesting case study of this.
In 1981, as I said, the crisis was on the verge of bankruptcy, and the auto companies went to the Reagan administration
and requested that they negotiate what's called a VER,
which is a voluntary export restraint, quote unquote,
with the Japanese government.
Basically what the Reagan administration said is,
look, if you don't limit the number of exports to the U.S.,
Congress is going to pass a quota that's going to limit them even more
than if you do it voluntarily.
So the Reagan administration blackmailed the Japanese government.
So, instead of 2 million units, automobiles being sold in the U.S. every year, as had been the case, the limit was put at 1.65 million units.
Now, what's interesting is, what happened to the, what do you think happened to the price of automobiles in the U.S.?
Well, they went up. In fact, the price of imported Japanese cars went up.
So we set up a cartel. After condemning OPEC for setting up a cartel of oil, which squeezed the amount of oil sold to the West,
we, on our own, set up an automobile cartel between the Japanese producers and our producers.
So the Japanese producers had to, by law, limit, or by their government's edict, to limit the amount of automobiles exported.
And as a result, the price went up. So Japanese automobiles increased in price by about $2,500.
In 1984-85, there was $2,500 higher price than there had been.
So the U.S. producers were now able to raise their price using that higher price as an umbrella.
And so U.S. automobiles went up by about $1,500.
Part of the increase in the price of the Japanese automobiles was due to the fact that
Since they were limiting the number that they could send, they began to send their top-of-the-line products to the U.S.
So part of it was the fact that they were selling more expensive automobiles.
But so U.S. consumers then had to pay a total of, I think the figure was 25 billion dollars more in 1984 and 1985
than they would have had to pay if the government hadn't intervened and restricted the number of Japanese automobiles.
and about 10 billion of that went to the Japanese,
because they were selling their cars at higher prices.
Now in terms of supply and demand and the elasticity of demand rather,
here's what we got. Here's a simple example.
Let's say the U.S. automakers are currently selling at $10,000
and let's take Ford Taurus as an example.
They're selling 100,000 units per year at $10,000.
Now, they're losing money, as many automobiles, auto producers were doing, US auto producers, in the early 80s.
With free trade, if they tried to raise their price, let's say, from $10,000 to current price of $12,000,
just look at the flatter demand curve, D1. Since there's available substitutes, that is foreign cars,
What would happen is that, in this case, the way I've drawn it, Americans would cut back by 60,000 models.
Quantity demand would shrink tremendously. Their total revenue would fall and it wouldn't be worth their while to do so.
What they would do then would be to leave the price of $10,000.
On the other hand, once the government steps in and limits through voluntary export restraints the amount of imports from Japan,
In that price range, Japanese cars go up in price, in that price range the alternatives are much smaller.
You cannot now turn to the cheaper Japanese cars or the equally priced Japanese cars.
Their prices have shot up.
So now the government has coercively changed the shape of the demand curve from D1 to D2.
Now notice what happens.
Because people cannot substitute these cheaper Japanese cars, because they've gone up in price for the American car,
What happens is that people only cut back from 10,000 to 95,000, or 100,000 to 95,000 units per month, and therefore it is worth the while of, and I'll show you with numbers, worth the while of the U.S. producers, in this case Ford, to raise the price.
So if you look, when Ford is selling at 10,000 dollars, it's selling 100,000 units, its total revenue is 10,000 times 100,000 or 1 billion dollars.
Now, if they were to raise the price of $12,000 on that first demand curve, without any VER, they are selling at a higher price, but they've lost 60% of their sales, so what happens?
Their total revenue falls from $1 billion to $480 million. It's not worth for them to raise their price.
However, if the government steps in and limits the range of alternatives,
limits the available substitutes from abroad, then notice total revenue with the VER would be $12,000 a higher price,
but now they're only losing about 5% of their sales because Americans really can't substitute the cheaper foreign product,
because their prices have gone up. Now what happens to their total revenue? It goes up to $1.14 billion.
And in fact, that's exactly what happened. We had higher prices in the U.S. from 1981 to 1985 of both foreign imports and U.S.-made products.
So that's an example, as we'll see later on, of monopoly.
And remember Lee Iacocca, who supposedly saved or turned around Chrysler?
In fact, Lee Iacocca was one of the biggest lobbyists for getting this VER in place.
The higher prices that were caused by this monopolistic privilege, restricting free trade, was what caused the turnaround in Chrysler.
People then looked back and said, look, the government bailed out Chrysler and it stayed in business and it thrived.
In fact, it would not have thrived had it not been for this government, in effect, subsidy from consumers to these firms.
Okay. There's a few other, let me just give you one or two case studies that I brought here on why elasticity is important.
I have it here.
And then I'll take questions.
Here's an interesting case. In Macon, Georgia, there used to be a Macon, or at least when this book was written back in the 90s, there was a Macon Labor Day road race, which was a 5 kilometer and 10 kilometer running event.
It was held annually in Macon, Georgia. The entry for the race in 1990 was $12 per runner. The fee was raised to $20 per runner for the 1991 race because they wanted to increase the revenues for charity.
So they raised it by about 67% from $12 to $20. Prior to the race, there were complaints that the fee was too high for that kind of race and that it precluded many families from being able to afford entry fees.
The newspaper learned a lesson in price elasticity for running events from this experience. In 1990, the road race attracted 1,600 runners and thus times $12 generated an income of almost $20,000.
$18,000, $19,200. Guess what happened in 1992, or in 1991, after they raised the price.
Under similar weather conditions, the race attracted only $900, so people from $1,600
was cut back to $900. Times the higher price of $20, that only gave $18,000.
So they lost total revenue at the higher price, because the demand was very, very high.
People had a lot of alternatives to running a road race that day. They could have stayed home and done yard work,
television, taking their families to the beach, whatever it was, okay.
Another good example has to do with government taxes.
When government taxes things, these so-called, what's the name,
taxes on things that are immoral or sin taxes, yes.
When they put, they call them sin taxes, but really they're inelastic taxes.
There are taxes on goods that are inelastic, because things like cigarettes and alcohol,
if you tax all brands of alcohol and all brands of cigarettes,
the demand for those things are very, very inelastic.
So what happens is that by pushing the price up, the government gets a higher and higher tax revenue.
However, that's not true of everything.
In 1990, the Congress put a luxury tax on both boats, yachts, airplanes, and maybe fur coats, over $100,000.
I think it was a 15% tax. It's pretty high. Here it is.
A 10% tax is added to the cost of luxury yachts.
And I think it was also high-end automobiles like Ferraris and so on that came under this tax.
Since the yacht today, when this was written in 1990, since the yacht today costs anywhere from $100,000 to $200,000,
this means at least $10,000 had to be paid to the government before a potential buyer could get his first whiff of the salt air, as they say here.
With the economy already heading for trouble, this was the proverbial straw that broke the camel's back.
Ocean Yachts in Weekstown trimmed its workforce from 350 to 50.
Egg Harbor Yachts, and this is all New Jersey, it's a big yacht industry in New Jersey where I live.
Egg Harbor Yachts entered Chapter 11 bankruptcy, going from 200 employees to five.
Viking Yachts dropped from 1,400 to 300 employees.
The boat industry nationwide lost 7,600 employees.
So, almost the entire, I think there was only like five yachts built in New Jersey that year compared to hundreds that had been built the summer before.
Why is that? Well, in the case of a luxury good, it's highly elastic.
People can shift to other ways, especially wealthy people at buyouts, can shift to other ways of spending their money.
So, the government repealed that very quickly. It almost destroyed the industry.
The key point to keep in mind is that the government is always aiming at taxing things,
not because they're immoral or because they're harmful to health.
Maybe that might be part of it, but their prime consideration is to tax something
that people cannot substitute out of so that they spend more money on it.
That's why they pick liquor and that's why they pick cigarettes and gasoline.
What's so sinful about gasoline, right?
Why do they tax gasoline at such a high rate?
Because it's inelastic. They're doing what OPEC was trying to do.
Back in the 18th century or so, and maybe a little later than that,
the kings in Europe and Great Britain used to tax matches and salt.
Why? Well, because there was a match monopoly and a salt monopoly.
...tax those things at very high rates to earn revenue for the treasury, because people could...
...salt was the only way to preserve meats back then. There was no refrigeration, obviously, okay?
And matches were, you know, a very convenient and only way of creating fire, unless you wanted to, you know, rub sticks together and so on.
So, in any case, governments are always looking to tax inelastic products.
We'll have a few other case studies, but I see it's a little bit late, so I'll take some questions.
Questions, comments?
Well, just so the young people in here will know, the least suitable way to wear your slides a little back in the 60s was in a leather holster swimming.
That's funny, yeah, I know that's...
I'm not even as religious as a hollow church, you know, we have that.
I like that.
The book satchel didn't have you if you had these books in the satchel, but a backpack I guess you had beaten up.
Yeah, no one wore a backpack back in the 60s, absolutely not.
Yes?
You said that all demand curves hold to the right, but it seems that there are some significant exceptions,
Go ahead.
The question is, what about goods in which there seems to be a positive correlation between their price and the quantity demanded?
That is things like a fine art in which the higher the price, the more desirable the good becomes and the more of it, or the greater demand, let's say, for it, or the greater quantity demanded.
Well, in fact, I think someone who follows a causal realist approach would say the key is the intermediary step.
is people's reaction or people's view of the piece of art is changed when they feel that for whatever reason, it could be a change in price.
For whatever reason, it is something that has a higher quality.
And that might be the case when people go into some stores and they avoid the cheapest type of the product and try to get an intermediate price product.
What they're doing is they're using price as a proxy for quality.
So in their eyes, subjectively, quality is going up as a result of the higher price.
So we would say that the demand curve is actually shifting out to the right.
We wouldn't say that the demand curve is upward sloping to the right.
We're just saying it's shifted.
That is, von Mises used the example of a restaurant that serves the same type of food,
But, yet, it's in the same location, let's say, there's one across the street from the other, and so, and let's say their staff is equally competent and so on.
But one has more intimate lighting and so on, and also they sweep the floor, and the other doesn't.
Well, the key here is that there are other dimensions of the physical product that factor into your demand for the good, okay?
And one of the dimensions may very well be price.
That is, there are many dimensions that affect your perception of quality.
Actually, it's really a package. An entrepreneur sells a package.
The good is the meal within a certain ambiance and a certain location at the restaurant.
The same thing is true with art in the sense that once people think that there's prestige attached to this particular item
or Group of Items of Art because of the higher price, there's an increase in demand for it, but of course it can't go on forever, that relationship, because it would absorb all the income in the world.
It's better to look on it as a downward sloping demand curve which is shifting out, as people's perception of its quality change. Yes, Matt.
I was trying to listen closely to what you were saying. You were defining the precondition of voluntary exchange, and you made the point that both parties don't have to value the goods exchanged equally in a one-to-one relationship, but in fact there's a double inequality of value where, well, as I guess, so as I understand, it's not a one-to-one relationship, it's a double inequality of value.
What I was thinking is, what is being described, a measurement, a value, based on a social relationship, as opposed to just the goods themselves?
And why that would be important again for thinking about the political implications of economics?
okay the question is what in the case of voluntary exchange one of the
preconditions is a double inequality of value that is both parties valuing
things differently now what is the implications of that versus the
implications social implications of that and implications for political economy
versus sort of an equality of value being assumed between the two items
So, doesn't it have something to do with the culture or the social relationship between people?
It's a relationship between his own mind and the items that are to be valued.
And each person does it individually.
Socially, it's expressed in the exchange ratios or the prices.
The point about value of two items being equal,
I think, is sort of a hangover from maybe from Aristotle,
that somehow, when things are exchanged, they must somehow be equal in value.
There's some equality expressed in that.
And I think one of the most important contributions of the marginal revolution
is that that's really not true in any sense, on an individual level or on a social level.
That is, prices are expressed in money.
they don't measure the value of anything
okay money is another form of commodity or another type of commodity that it's
exchanged
universally among people
for other items that that they they desire to use
I'm a little disappointed in Reid's article, I Pencil, I think he did a half excellent job, the other half being how the price system ties all of this together, it's a nervous system just like in our body and so on.
The comment is that in letter-read article I, pencil, it's not informed with enough references to the price system and how the price system ties all of these activities involved in producing a pencil, how it ties it together.
I just think what he was sort of assuming that without any government intervention, the price system was there in the background operating,
And he was showing that you didn't need centralized knowledge to bring about the production of this very, very complex, or at least in a way that's produced, complex good, okay?
The good itself is simple, but it's produced most cheaply in a complex way.
You could produce it probably very simply, okay, or much more simply, but yet it wouldn't be as economical.
The price system tells us, as we'll see, through monetary calculation, that that is the cheapest way to produce it.
Okay, thank you.