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Furslid comments on How much does consumption affect production? - Less Wrong
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This is true in the short term, but in the long term, the dynamic changes for producers:
The elasticity of the demand curve changes less than the supply curve in the super long term, but if you agree with me that the supply curve is virtually flat at that point, then the elasticity of the demand curve is negligible (because as the supply curve shifts left and right, the only point on the demand curve that matters is quantity @ price = Cost/Supply price).
No. It's true long term as well.
What you have listed are forces that drive the cost of production down. However, they cannot flatten all costs. For example, some locations are better for producing chickens than others. Better weather, cheaper labor market, ease of transportation to slaughter, etc. These factors cannot be cloned.
It's only the marginal producers that have costs at or just below the price.
In the specific example, they could be cloned by expanding in the good locations.
More generally, if you're claiming that there's a limited supply of good locations from which to produce chickens, then that reduces to a "finite inputs" argument I discuss in the last section of the OP. (For further discussion see responses to this comment .)
In short, I agree that such effects can create a sloping long term supply curve in some cases, but I also believe that there are other effects that can lead it to slope the opposite direction, and it's not immediately obvious which wins out. My prior is that the long term supply curve for an arbitrary product is virtually flat.
Said another way, if you're going to argue that the long term cost-per-widget is higher when producing 2X widgets than X widgets, then you have to argue that the effect of finite inputs outweighs gains to scale and other factors. I haven't seen such an argument generally or in the case of chickens.
Do you have empirical (as opposed to economics-theoretical) support for this prior?
No, I haven't looked at the empirical evidence because I didn't think it would be as convincing as the 2 theoretical arguments I made in the original post; let me know if you are aware of any such analysis.
Would you accept the results we find from an analysis of Big Macs as relevant?
Heh. It seems we have pronounced... methodological differences :-D
Empirically, some industries are approximately constant-cost, others are increasing- and decreasing-cost. OP mentioned certain factors pushing one way or the other, but ultimately the slope of the long-run supply curve of an industry is determined by which factors predominate, so we'd have to measure it to be sure. What is generally true, however, is that long-run supply is typically highly elastic, so cost doesn't change much from marginal changes in demand.
Empirical evidence is nice and often more convincing than theory, but I don't think it's necessary for an argument to be convincing (to believe otherwise would be quite... burdensome).
In this case, the original articles I am critiquing used purely theoretical arguments to claim that there will be long term price elasticity of supply, and I think that a theoretical critique is sufficient to show that the strength of their arguments is currently too weak to support the complexity of their theory.
I'm certainly open to any empirical evidence that may exist. Would you find a quick analysis of Big Macs moving (or if not, do you have a suggestion for a different empirical analysis)?
The first question is whether you're interested in being convincing or in getting an accurate map.
Economics, in particular, is well-known for its fondness for theoretical arguments which tend not to hold up in real life.
You'll have to specify what you are looking for. In particular, how long is "long term"? What kind of goods or industries you want to include and exclude?
For example, it wouldn't be hard to find both price and supply (=production) data for major commodities (oil, copper, wheat, etc.). You could plot a scatter graph, attempt to fit a model....
What you are effectively claiming is that there are no suboptimal producers of chickens. Unless every producer of chickens is ideally located, ideally managed, ideally staffed, and working with ideal capital there are differences in production costs.
There is a reason, that economics assumes that the amount of a good supplied changes as price changes, and I haven't seen any argument that exempts the case of chickens.
Also, how does the market create less chickens as demand falls? If there are differences in cost, the highest cost producers leave the market as price falls. Easy to answer with the standard assumptions, but almost impossible with your nonstandard prior.
It's not that this will ever actually be the case, but the argument is that, in the long term, the market approaches what you would expect with such assumptions (and continues to have short term fluctuations away from that). But yes, even this assumption is clearly not actually true in all cases (as with all assumptions in neoclassical economics); the better question is whether it's a good simplification (enough to form a reasonable prior) or whether there is a better simplification we can consider (either simpler or more accurate).
The estimates I'm critiquing in the original post assume "short term elasticities are the best prior for long term elasticities" and I am advocating that "a better prior for the long term cumulative elasticity factor is 1".
The explanation of both of these issues is the short term supply curve (which is not flat). In the short term, if people stop eating chicken, the price drops, and the producers that are (in the short term) able to improve their (expected long term) profits by scaling or shutting down do so.
That is an excellent question, but it requires an additional piece: good for what purpose?
Right. In this case, to answer the question, "If I decide to reduce my lifetime consumption of chicken by one, should I expect the long term production of chicken to drop by ~1, ~0, or something in between?" Which is of demonstrated interest to the authors I am critiquing.
That question seems to have a simple answer: your decision will not affect the long-term production of chicken.
Now I suspect that the real question is "If X million people decide to stop eating chicken, what would happen to the long-term production?" That is a much more complicated question which I don't think can be answered by moving or bending the supply and demand curves under the ceteris paribus assumption. One reason is that it's scale-dependent: different magnitude of X gives different answers. If X is small, its effect would be swamped by other factors (e.g. the growing prosperity in the developing world which generally leads to more people eating meat) and at the other end, obviously, if everyone stops eating chicken the production would drop to zero and chicken will become extinct.
Let X and Y have a causal relationship of the following form: if X is set to a given value x, Y takes on a value kx + z, where z is the value of a random variable Z which is independent of X.
What is the expected change in Y caused by a change in X of size dx?
It is k dx.
It does not matter how much the change in X is "swamped" by the variability of Z. It does not matter if it is so large that the change in Y consequent on that change in X cannot possibly be observed. The expected change is still k dx.
Of course, but you are assuming a linear relationship (y =kx + z) and I am unwilling to assume one.
OK, so I argue option A, you state option B, and the articles I link argue option C.
I agree it's a complicated question (in that it requires lots of information to answer precisely and accurately). If you had no empirical data to work with, what would be your best guess/expectation? Also if your answer is proportionally different than in the 'single chicken' case, I'd be curious to know why.
If I had no empirical data, I would not be making any guesses in this case.
The "single chicken" case is below the noise floor. Empirically speaking, the consequences are undetectable. And for "many chicken", how many matters -- I don't think there is a straightforward linear case here.
Cumulative elasticity = Supply Elasticity/(Supply Elasticity - Demand Elasticity).
A cumulative elasticity factor of one means a demand elasticity of 0.
A completely inelastic demand curve is not to be expected in standard economics, and as such it is an inappropriate prior. Thanks for the math demonstrating my point.
I believe your math skipped a step; it seems like you're assuming that Supply Elasticity is 1. I actually claim in the original article that "the 'price elasticity of supply' in the arbitrarily long term becomes arbitrarily high". In other words, as "length of 'term'" goes to infinity, the Supply Elasticity also goes to infinity and the cumulative elasticity factor approaches 1 for any finite Demand Elasticity.
Stepping back, I worry from your sarcastic tone and the reactive nature of your suggestions that you assume that I am trying to 'beat you' in a debate, and that by sharing information that helps your argument more than it helps mine, I have made a mistake worthy of mockery.
Instead, I am trying to share an insight that I believe is being overlooked by the 'conventional wisdom' of this community and is affecting multiple public recommendations for rational behavior (of cost/benefit magnitude ~2x).
If I am wrong, I would like to be shown to be so, and if you are wrong, I hope you also want to be corrected. If instead you're just debating for the sake of victory, then I don't expect you to ever be convinced, and I don't want to waste my effort.
Oops, I meant to edit that rather than retract. Since I don't believe there's a way to un-retract I'll re-paste it here with my correction (Changing "Supply Elasticity is 1" to "Supply Elasticity is finite"):
I believe your math skipped a step; it seems like you're assuming that Supply Elasticity is finite. I actually claim in the original article that "the 'price elasticity of supply' in the arbitrarily long term becomes arbitrarily high". In other words, as "length of 'term'" goes to infinity, the Supply Elasticity also goes to infinity and the cumulative elasticity factor approaches 1 for any finite Demand Elasticity.
Stepping back, I worry from your sarcastic tone and the reactive nature of your suggestions that you assume that I am trying to 'beat you' in a debate, and that by sharing information that helps your argument more than it helps mine, I have made a mistake worthy of mockery.
Instead, I am trying to share an insight that I believe is being overlooked by the 'conventional wisdom' of this community and is affecting multiple public recommendations for rational behavior (of cost/benefit magnitude ~2x).
If I am wrong, I would like to be shown to be so, and if you are wrong, I hope you also want to be corrected. If instead you're just debating for the sake of victory, then I don't expect you to ever be convinced, and I don't want to waste my effort.
I'm sorry, that is correct. You were describing a supply curve that doesn't behave normally. So I can't say anything about demand curves. I apologize for the cheap shot.
In the standard economic models, supply and demand curves have elasticity that is a positive, finite number. Infinitely elastic curves are not possible within the standard models.
The priors I start with, for any market, are that it behaves in a manner consistent with these economic models. The burden of proof is on any claim that some market is behaving in a different manner.
Thanks for acknowledging that.
I think standard economics agrees with your vision of "~always positively-sloping finite supply curves" in the short term, but not necessarily the long term. Here's a quote from AmosWEB (OK, never heard of them before, but they had the quote I wanted)