Tinark and others: addictive commodities are certain to be partially influenced by market forces; if they weren't, then all inelastic commodities would quickly become essentially infinitely expensive. The point is not that they don't respond at all, it's that they don't respond properly (think "efficiently," perhaps). Consider this analogy: if I'm severely out of shape, that doesn't mean my body can't function at all, or that my heart beats backwards; it does mean that my body just doesn't function well/efficiently/properly.
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I'm not really understanding what you are saying. Inelastic demand is a sign that a market IS functioning properly. As price gets higher and higher, eventually demand becomes elastic. The elasticity of demand is not constant, it changes with price. A profit maximizing monopoly (or firm with market power) would never price their product at such a point that demand is inelastic. I can go over the specifics if you are interested.
The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.
Albert Einstein
I'm not really understanding what you are saying. Inelastic demand is a sign that a market IS functioning properly. As price gets higher and higher, eventually demand becomes elastic. The elasticity of demand is not constant, it changes with price. A profit maximizing monopoly (or firm with market power) would never price their product at such a point that demand is inelastic. I can go over the specifics if you are interested.
I admit to being confused by the apparent claim that inelastic demand is a sign that the market is functioning properly because it eventually goes away when prices become too high. To me, that kinda sounds like it is the absence of inelastic demand that is a sign that the market is functioning properly. But also, as I have subsequently stressed, I'm not saying that any level of inelasticity is a problem, I'm saying that the degree and type of inelasticity characterized by addictions that are the problem. None of what you describe above in a healthy market (price-dependent elasticity, market-power firms never pricing their products to the level of inelasticity) can be seen in the two charts I've posted (on US gasoline pricing and consumption), so how can you say the market is working properly?
You are correct. In the case of Bush, he really doesn't care that the price isn't actually regulated by market forces, he just wants us to believe it is so that he, his family and his crew can clean up at our expense. I loved it when Arlen Specter even acknowledged that he was aghast.
It turns out that those who are least likely to listen to someone critique a particular game are those who are winning it. Looking at history, it seems that the game can be quite depraved (the so called "Good Germans", for example) and the winners will still go out of their way to defend it, to rationalize problems away, push it out of their minds, find ways to discredit the critics. Which of those playing the school game are most likely to react to homeschoolers with hostility? The winners! Those who think they enjoyed school, got great grades, earned sports trophies in high school, got into a good college and landed a super job - they, being the winners of that game, will most resent those who reject schooling. This just seems to be a pattern with humans. Those at the top of a pyramid scheme will give up their pyramid when a camel moseys on through the eye of a needle (which I think means "never"). Pardon me for deviating a bit from thread topic... I'll bet those who are winners in the capitalist game won't hear critiques of their game, either. I think intellectual honesty must be one of those things you inherit a gene for, like religious feeling or national feeling or a predisposition to build rockets or design clothing...
"It was one of those days that, more than most, reminds us that war, no matter how much we may enjoy it, is no strawberry festival." -Frank Burns
I admit to being confused by the apparent claim that inelastic demand is a sign that the market is functioning properly because it eventually goes away when prices become too high. To me, that kinda sounds like it is the absence of inelastic demand that is a sign that the market is functioning properly. But also, as I have subsequently stressed, I'm not saying that any level of inelasticity is a problem, I'm saying that the degree and type of inelasticity characterized by addictions that are the problem. None of what you describe above in a healthy market (price-dependent elasticity, market-power firms never pricing their products to the level of inelasticity) can be seen in the two charts I've posted (on US gasoline pricing and consumption), so how can you say the market is working properly?
This has been educational; but I'm still trying to figure out what you're saying, being new to this (you mentioned that it's "simple"; true if you're used to it!). Do you mean that the price of bath tissue isn't controlled by demand because the demand remains mostly the same no matter the price? Does this mean that bath tissue should be a lot cheaper than it is? I just remembered hearing a few weeks ago on NPR radio (a.m. radio has too many shouting, angry guys on it) that the cost of getting a barrel of oil in the Middle East out of the ground is some insanely small number, like 25 cents (I don't remember now) but we are charged 60 bucks a barrel(I don't know, but the difference was about that insane). Is this related to what you're talking about? I expect it gets taken out of the ground, then has to be processed, then shipped... Many thanks.
"It was one of those days that, more than most, reminds us that war, no matter how much we may enjoy it, is no strawberry festival." -Frank Burns
I admit to being confused by the apparent claim that inelastic demand is a sign that the market is functioning properly because it eventually goes away when prices become too high. To me, that kinda sounds like it is the absence of inelastic demand that is a sign that the market is functioning properly. But also, as I have subsequently stressed, I'm not saying that any level of inelasticity is a problem, I'm saying that the degree and type of inelasticity characterized by addictions that are the problem. None of what you describe above in a healthy market (price-dependent elasticity, market-power firms never pricing their products to the level of inelasticity) can be seen in the two charts I've posted (on US gasoline pricing and consumption), so how can you say the market is working properly?
Yes, it is true that an addiction causes demand for the product that satisfies the addiction to be more inelastic.
Also, elasticity has a time component to it. Products become less inelastic over a larger time frame; gasoline, in this case. If the price per gallon doubled tomorrow, there isn't really much you can do about it in the short run. You would probably suck it up at first. But your future decisions would be affected. Next time you move you might opt to live closer to where you work. You might try to hook up with some co-workers for carpooling. The next time you purchase a vehicle you may decide that the SUV you wanted isn't worth the cost in gas. Over time, decisions like these cause the demand for gasoline to go down in the long run more than it would in the short run for a given increase in price (and ignoring all other variables)
Also, demand becomes less elastic the lower the price is for an item and more elastic the higher the price is for an item. If a firm has market power (a monopoly, for example), then raising the price of an item that is currently inelastic will cause profits to go up. Elasticity of demand is % change in quantity demanded/% chance in price. A profit maximizing monopoly, in order to maximize profits, will raise price such that the demand for its product is elastic. There will always be such a price where demand becomes elastic, even for extremely addictive substances. Raise the price high enough, and the person will simply not be able to afford the product by any means. If demand for the product were inelastic, the firm would always be able to make more profit by raising price. This is why if the demand for a product is very inelastic, it shows that the market is competetive (and hence functioning as designed). The only way that these prices are low enough to cause such inelasticity is because of competition.
This isn't to say that the market is perfectly competitive. The size of the big 5 oil companies do give them some market power, but it does not seem to be nearly as bad as many people make it out to be.
Also, if I understand your charts correctly, you are saying that demand remains high or even seems to increase (or at least remains unaffected) when the price of gasoline increases, and thus the market is not functioning properly. During periods of higher demand (the summer, for example) and as time passes (gasoline comsumption per capitia is increasing due to the increase in real income) we would expect more demand for any given price. You seem to be confusing a shift in the demand curve (an increase in demand would mean people are willing to buy more product at every price) vs. an increase in quantity demanded (moving along a demand curve, which is downward sloping by the law of demand, and hence the only way to raise quantity demanded is to lower price). Also, as mentioned previously, this is a sign that demand is fairly inelastic. If I remember correctly, the elasticity of demand for gasoline is .2 in the short run. This means that if the price of gasoline were to go up 10%, demand would fall by 2%. Yes, relatively inelastic.
I hope this isn't too confusing, let me know if you have any further questions.
The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.
Albert Einstein
Last edited by Tinark; February 5th, 2006 at 10:38 PM.
This has been educational; but I'm still trying to figure out what you're saying, being new to this (you mentioned that it's "simple"; true if you're used to it!). Do you mean that the price of bath tissue isn't controlled by demand because the demand remains mostly the same no matter the price? Does this mean that bath tissue should be a lot cheaper than it is? I just remembered hearing a few weeks ago on NPR radio (a.m. radio has too many shouting, angry guys on it) that the cost of getting a barrel of oil in the Middle East out of the ground is some insanely small number, like 25 cents (I don't remember now) but we are charged 60 bucks a barrel(I don't know, but the difference was about that insane). Is this related to what you're talking about? I expect it gets taken out of the ground, then has to be processed, then shipped... Many thanks.
It is true that the Middle East has some of the lowest costs for extracting oil from the ground. I believe it is closer to like $4/barrel. The price charged for a barrel of oil, though, has little to do with the costs to extract that oil. There is only a limited amount of oil that can be extracted at an average cost of $4/barrel. Elsewhere in the world, costs range from $10-$30+ average per barrrel of oil. If oil only cost, let's say, $6/barrel, then demand for oil would rise quite a bit (based on the law of demand) and all the companies elsewhere in the world where it costs more than an average of $6/barrel to extract the oil would discontinue their operations, because they would not be making a profit. So you would simultaneously have a large increase in world demand for oil, and a dramatic decrease in world supply. This would cause a severe shortage in oil. Much more oil would be demanded at $6/barrel than producers would be willing to supply at $6/barrel. In very simple terms, the market has determined, in current conditions, $65/barrel of oil is the price where the number of barrels suppliers are willing to supply at $65 roughly equals the number of barrels of oil people are willing to buy. Hence a rough description on why the price of oil is no where near what it costs the Middle East to extract that oil.
The question on competitiveness of the oil market comes to the question: are oil companies supplying all the oil they should be willing to at $65/barrel, or are they purposely holding back supplying oil in order to raise the price of oil? In order to answer that oil companies are purposely holding back supply you would have to find evidence that oil companies could profitibaly supply more oil to the market, but are not. I think we all know that OPEC does indeed attempt to fix supply to increase price, but this is nothing really new. I don't see any evidence that ExxonMobil, Shell, Total, BP, Chevron, or ConocoPhillips all have an agreement with each other to fix supply in order to raise the price of oil and increase their profits. This would be collusion, and, even if it were going on, is very unstable (for reasons I will not go into in this post). In order to say the market is not working properly, you would have to provide evidence of collusion. Such evidence might include showing that oil companies are not making investments to supply more oil to the market (which is not the case, there are in fact a record number of projects in development by the various oil companies to supply more oil to the market) or evidence that current developed oil fields are running below normal capacity (I have not seen such evidence, and have seen reports that most developed oil fields are in fact running at near full capacity.) It is not just a bunch of guys sitting in a room deciding to charge whatever price they want. Not only does price have to be set, but supply would have to be purposefully withheld in order to be able to charge that price.
Also, on bath tissue, the price of bath tissue is roughly where it "should" be. Once again, like in the oil example, if the price of bath tissue were cheaper, demand for bath tissue would be little changed, but the number of companies willing to make and sell bath tissue would decrease, because, for some at least, the price of bath tissue would fall below what their average cost is to make that bath tissue. They would discontinue operations because they would no longer be making a profit. Hence we would have a shortage in bath tissue. To continue on with the example, since there would be a shortage of bath tissue, existing firms could increase their price on bath tissue until the shortage is eliminated (raising price high enough so that some people would buy less bath tissue.) But, now that the price of bath tissue is higher, those firms that discontinued their operations when the price was low can now start back up, because they would now be able to make a profit at the now higher price. Since more bath tissue is now being supplied to the market, the price would fall somewhere to where it was when we started out. Hence, we have a balance.
The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.
Albert Einstein
Last edited by Tinark; February 5th, 2006 at 11:27 PM.
Perhaps, but I don't see the relevance here, as I am not the one who chose the fruit. Check the first post. If you don't think oil prices should be dictated by market forces then you shouldn't say that oil prices are being dictated by market forces as they should be!
Nowhere does Bush say he doesn't think oil prices should be determined by the market. What he says is that America's dependence on oil is unhealthy and puts the country at risk. The reasoning behind alternative fuel development given is to protect America from oil price variability, uncertainity and eventual loss. I see no contradiction between believing these reasons are worthwhile and believing prices should be determined by the free market.
As we all know harvey, BB would prefer that he become world ruler, take all the wealth for himself and let everyone else die. He would feel no remorse.
I have always wondered why the price of gas is obviously below market price. Talked to an old Oklahoma "oil man" on Sat who said the govt is artificially keeping the price low for political reasons. Says the oil pumps one sees in the Oklahoma fields are NOT pumping oil but are olny going fast enough to keep the wells primed. Said there has been a pipe line from the US to Mexico that has never been used and could supply most of our additional need but we don't get any from Mexico.
I have always wondered why the price of gas is obviously below market price. Talked to an old Oklahoma "oil man" on Sat who said the govt is artificially keeping the price low for political reasons. Says the oil pumps one sees in the Oklahoma fields are NOT pumping oil but are olny going fast enough to keep the wells primed. Said there has been a pipe line from the US to Mexico that has never been used and could supply most of our additional need but we don't get any from Mexico.
I happen to have a family contact (ex oil company veep), and he once suggested I look at the annual reports of the big oil companies at the deferred income tax information. This may have changed recently (not sure why that would be, though!), but they "owe" a rather large amount of money but are under no obligation to pay at or by any particular time.
I happen to have a family contact (ex oil company veep), and he once suggested I look at the annual reports of the big oil companies at the deferred income tax information. This may have changed recently (not sure why that would be, though!), but they "owe" a rather large amount of money but are under no obligation to pay at or by any particular time.
As I am majoring in accounting in college, I can tell you that this is BS. Deferred taxes result from the differences in the way financial information is reported to the public and to the IRS. There are several different methods to reduce the tax liability such as reporting accelerated depreciation to reduce tax liability to the IRS but a non accelerated method may be used when reporting financial information to the public. There are two sets of books for a company. This is all perfectly legal. As oil companies are an extremely capital intensive business, most of this deferred tax liability does indeed come from accelerated depreciation being reported to the IRS, but straightline depreciation being used on their financial statements reported to the public.
The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.
Albert Einstein
As I am majoring in accounting in college, I can tell you that this is BS. Deferred taxes result from the differences in the way financial information is reported to the public and to the IRS. There are several different methods to reduce the tax liability such as reporting accelerated depreciation to reduce tax liability to the IRS but a non accelerated method may be used when reporting financial information to the public. There are two sets of books for a company. This is all perfectly legal. As oil companies are an extremely capital intensive business, most of this deferred tax liability does indeed come from accelerated depreciation being reported to the IRS, but straightline depreciation being used on their financial statements reported to the public.
Entirely possible. My dad's the accountant in the family, not me. But although they may boil down to the same thing, the definition you give sounds a little different from what I've heard and read, for example:
"A liability that results from income already earned, is recognized for accounting but not tax purposes purposes, and is recorded on the balance sheet.
In other words, the income has been realized, but the tax on that income hasn't."
"A liability in the balance sheet representing the additional Federal income taxes that would have been due if a utility had not been allowed to compute tax expenses differently for income tax reporting purposes than for ratemaking purposes."
Entirely possible. My dad's the accountant in the family, not me. But although they may boil down to the same thing, the definition you give sounds a little different from what I've heard and read, for example:
"A liability that results from income already earned, is recognized for accounting but not tax purposes purposes, and is recorded on the balance sheet.
In other words, the income has been realized, but the tax on that income hasn't."
"A liability in the balance sheet representing the additional Federal income taxes that would have been due if a utility had not been allowed to compute tax expenses differently for income tax reporting purposes than for ratemaking purposes."
Your quotes are correct. The tax has been recognized on the income statement reported to the public, but since it hasn't actually been paid out it is reported as a future liability. The IRS allows income to be computed differently than what is reported to the public. The taxable amount on the difference gets put in as a "deferred taxes" liability on the balance sheet. This is done so that income reported to the public is not overstated (by making the tax rate look artifically low). The future taxes are expensed earlier than from when they are actually paid out.
The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.
Albert Einstein
Last edited by Tinark; February 8th, 2006 at 04:40 PM.
The important thing is not to stop questioning. Curiosity has its own reason for existing. One cannot help but be in awe when he contemplates the mysteries of eternity, of life, of the marvelous structure of reality. It is enough if one tries merely to comprehend a little of this mystery every day. Never lose a holy curiosity.
Albert Einstein
Karl Marx lives!
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