I was discussing economics with a friend of mine recently, and they brought up a point for which I had no answer. Here it is: given a free market, companies tend to have some average percentage profit if they survive at all. The total profit they make, then, is dependent upon the volume of business done in an industry. This provides the incentive for them to attempt to increase the volume of business in the entire industry. Health insurance companies, for example, would have incentive to increase the amount of procedures done (necessary or not) because it would increase the total amount of business done in the industry, and therefore their total profit, independent of their profit margin.
This, says my friend, is an example of the free market giving a result that is not in the interests of the consumer.
Any takers?
I think the argument would be that they don't care how little water the poor people can afford, if the rich golf course patrons are willing to pay the price for the more expensive water.
My point is, why would the firm shut out an entire section of the market? If it failed to please its consumers, some other firm would quickly take control of that portion of the market (regardless of the alleged "elasticity" of increasing supply in that way.) The firm would try and balance things, in all likelihood, to both enjoy the golf course and common folk as its consumers. Moreover, as I said, consumers usually have contracts with firms they subscribe to for things. If so it'd be acting in violation of it.
I don't know, actually. It's some kind of relative term, right? Like the cost for increasing the supply is an order of magnitude greater than that of other goods in the same class? (whatever "same class" means) I'll grant you that I can't answer this question definitively, but I'm confident he has some stock Keynesian answer ready for this. What might it be - any idea?
It's how sensitive changes in supply are to price changes. There's no real objective way of establishing this (other than the absolutes, i.e. completely elastic or inelastic.) It's a historical datum of how prices tend to move, and nothing more.
-Jon
To darkness I condemn you...
Jon Irenicus:My point is, why would the firm shut out an entire section of the market? If it failed to please its consumers, some other firm would quickly take control of that portion of the market (regardless of the alleged "elasticity" of increasing supply in that way.) The firm would try and balance things, in all likelihood, to both enjoy the golf course and common folk as its consumers. Moreover, as I said, consumers usually have contracts with firms they subscribe to for things. If so it'd be acting in violation of it.
Okay, I see what you mean, and I think that practically, this is the way it would go. If I were to play devil's advocate, though, I would say: "What if the golf course required a certain minimum amount of water to operate? Suppose that this minimum added to the minimum amount of water required for the survival of the poor inhabitants of this town is greater than the total supply of water available through the supplying company. Also suppose that the golf course owners are willing and able to pay much more for the water than the poor inhabitants, and that the water supply company will be unable to increase the water supply beyond the sum of these minimums for a year. Finally, assume for the sake of argument that the poor people's water contracts expire next month. Then would the free market not provide an incentive to abandon the poor to their dehydrated plight?"
It's a lot of suppositions and hyperbole, I know, I'm just trying to fill in the holes.
And again I'd object, why would the firm not just seek to balance it and thus retain both markets and profit in the long-run? Don't let your opponent try corner you with silly little hypotheticals like that. The more ridiculous they make the hypo, the less important it becomes, and this one's already been stretched quite a lot.
Jon Irenicus:The more ridiculous they make the hypo, the less important it becomes, and this one's already been stretched quite a lot.
Well, I'll grant that it seems ridiculous to you and I, but I think they take such situations very seriously. I'd like to be able to point out economic principles that defuse their fears. Any suggestions? :)
I pointed to it in my previous response. Why would the firm simply shut out a potential source of profit when it can act more conservatively and gain more? Why wouldn't another firm simply fill the niche? If it suspected there is profit to be had it would attain the water as fast as possible.
According to the scenario, though, the firm(s) are unable to increase the water supply sufficiently within the year, and unable to supply the minimum water requirement for either group.
In the long run, perfect competition leads that all firms tend toward zero profit margin.
At least that is what I was taught in elementary Economics courses.
Art transcends ideology.
http://mises.org/Community/blogs/ruben
I'm aware. It makes no difference.
synapz:I think the argument would be that they don't care how little water the poor people can afford, if the rich golf course patrons are willing to pay the price for the more expensive water.
i recommend that the residents put as much money as they can into purchasing stock in the local water supply firm
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
As long as we’re talking about hypothetical situations, we might as well take it to extremes.
Suppose that someone’s 21-foot sailboat sank off of the west coast of Africa and that this person ended up adrift in a life raft. Because of the currents, the raft headed west toward the Americas. This person has no food or potable water on the life raft, so the only way to stay alive for the 76 days before he is rescued by fisherman from the Caribbean is to use his solar still to gather water and rudimentary tools to gather food.
In the case of Steve Callahan, we don’t have to speculate as to how he would react to such a situation in 1981 (the book is Adrift: Seventy-six days lost at sea, 1986). He managed to stay alive by consuming as little as a third of a pint of water each day. The current minimum wage is $5.15 per hour, so, if we very conservatively estimate Callahan’s wage at $5.15 per hour and, again, very conservatively estimate his time collecting food and water at 12 hours per day, we end up with a minimum of $61.80 per day as his subjective value of a third of a pint of water and a few strips of fish.
So, are you going to water your golf course at the expense of people earning minimum wage when the cost of water is at least $741 per gallon? I think that you’ll have to charge some big-time greens fees.
Rubén: In the long run, perfect competition leads that all firms tend toward zero profit margin. At least that is what I was taught in elementary Economics courses.
Where does 'perfect competition' exist...outside of elementary economics courses?
From what I understand in The Real World™ profits tend towards the simple interest rate as there is little, if any, incentive to risk capital on projects where your return is less than a virtually risk-free investment as a loan.
synapz:Here it is: given a free market, companies tend to have some average percentage profit if they survive at all.
I don't think this assumption is correct. This is the kind of view people who have never been in business tend to have: that once you are in business there is some sort of conveyor belt that takes you along.
Profit depends on what you can sell your products for, which depends on your competition and your customers; and your costs. These variables all change all the time.
Expanding involves more cost and more risk, and so sometimes staying with your current size may make better business sense.
"companies tend to have some average percentage profit if they survive at all"
But not all companies survive, so you can't say at any one time the average rate of profit is positive. It's called "survivor bias".
"Health insurance companies, for example, would have incentive to increase the amount of procedures done (necessary or not)" Health insurance companies pay for the procedures, so they would have an incentive not to have them done. I suppose you mean that if health care was more expensive in catastrophic cases people would be unable to afford the expense if they didn't have insurance. Therefore health insurance companies have the incentive to make more expensive procedures common if there is a cheaper substitute, (whether or not said substitute is as effective). This is true, but they can't provide the level of incentive to providers that customers can by patronising the cheaper service. Certainly they could encourage providers to do the expensive procedure on their customers (that might even be to their customers good if the company pays and it's actually better) but obivously they have an incentive not to do this. The presence of health insurance companies themselves of course makes the payer and the beneficiary of a procedure different, encouraging procedures that aren't worth the money. This is a problem but not insurmountable, not what I think he meant though.
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