Stupid questions thread, October 2015

philh

This thread is for asking any questions that might seem obvious, tangential, silly or what-have-you. Don't be shy, everyone has holes in their knowledge, though the fewer and the smaller we can make them, the better.

Please be respectful of other people's admitting ignorance and don't mock them for it, as they're doing a noble thing.

To any future monthly posters of SQ threads, please remember to add the "stupid_questions" tag.

Please be respectful of other people's admitting ignorance and don't mock them for it, as they're doing a noble thing.

To any future monthly posters of SQ threads, please remember to add the "stupid_questions" tag.

Also not an economist.

The simple model would be: everyone needs a certain minimum amount of food. If everyone is getting $300 a month and spending $200 a month on food, and if the price of food suddenly jumps to $300 a month, people will start to spend $300 a month on food. So we'd expect the price of food to increase, so retailers can extract everything they can from customers.

I'm not sure that prices rise because of inflation, so much as inflation being the name we give to the phenomenon of rising prices. I'd be moderately surprised if economists could accurately (and precisely) predict the effects of UBI on inflation.

Remember that retailers are in competition. If Food Lion raises it's prices and Aldi does not, then Aldi magically gets more customers. Neither grocery store is motivated to become the High Cost Loser.

7satt11y

Also also not an economist, although I took economics classes once. I had a go at translating the simple model into one of those supply 'n' demand scribbles. For parsimony I assumed a straight line for the supply curve. For the demand curve I assumed no one bought more than the subsistence level of food, and that if the price was too high to reach that level, everyone simply bought as much food as they could with a constant budget. That makes the status quo and after a universal jump in income to relax everyone's budget constraint, the non-vertical part of the demand curve rises: At both times the intersection of S and D determines the equilibrium price. The intersection stays in the same place, so, in this incredibly simplified model, the equilibrium price is unaffected by everyone getting more money. Being so primitive, this graphical model does not remotely prove that the price would stay the same in real life. But in trying to figure out why the graphical model disagreed with the verbal model, I managed to put my finger on why the two differ, and I think it's a hole in the verbal model. The verbal model observes that if people have $300/month, all of the retailers could jack the price of food up to $300/month, and everyone would be compelled to pay that. But that assumes coordination/cooperation/collusion between retailers rather than competition. If every food retailer raised their price to $300/month, any one of those retailers could swoop in and steal the others' custom by cutting their own price to $299/month. And then another retailer could cut their price to $298/month, and so on. By the obvious inductive argument, the equilibrium price would wind up at the same $200/month it was before.