erratim comments on How much does consumption affect production? - LessWrong

4 Post author: erratim 05 January 2015 03:51PM

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Comment author: erratim 06 January 2015 06:30:57PM 0 points [-]

Huh? A flat supply curve means that the producers will produce the same number of chicken regardless of the price at which they can sell them. I don't see why this should be true in long term.

I mean "horizontal" rather than "vertical". In that sense, a flat supply curve means a constant price, not a constant quantity.

Not quite. You are implicitly assuming that the Cost is fixed in stone and it isn't. The chicken producer should accept all 10-year forwards on chicken if and only if he can buy matching forwards on his production inputs, otherwise he is exposed to the risk of, say, the price of feed going up.

I agree, but this is the type of pressure on Cost that I have no expectation of being in any particular direction. As a result, on expectation these perturbations average to zero, and the argument holds. It would be interesting if we had a reason to expect that Cost would go up or down depending on the amount of production. These are the issues my last section in the original article was intended to address.

Comment author: mwengler 06 January 2015 08:42:15PM 1 point [-]

I agree, but this is the type of pressure on Cost that I have no expectation of being in any particular direction.

The received wisdom is that if the demand for chicken feed goes up, the cost and price will go up, if the demand goes down, the cost and price will go down.

Comment author: erratim 06 January 2015 10:50:07PM 0 points [-]

If the received wisdom is that a larger chicken industry will increase the price of chicken feed, then my prior is that it's true in the short term, but not the long term. Chicken feed might be in finite supply, in which case Cost might grow with chicken industry size, but there are other reasons I can imagine Cost might shrink with increasing chicken industry size (listed in original article) and I don't have enough confidence about any of these factors to break my prior that Cost at industry size 2X is ~Cost at industry size X.

Comment author: Lumifer 06 January 2015 06:42:29PM *  1 point [-]

a constant price

So what you are basically saying is that in the long run the price will be driven close to the lowest average price -- right?

As a result, on expectation these perturbations average to zero, and the argument holds.

Still not quite, as once you recognize that "perturbations" will happen, you need to engage in some risk management (zero mean does not imply zero volatility). In your scenario the chicken producer seems to be fine with the 50% chance of going bankrupt at the delivery time which isn't a good assumption to make.

Comment author: erratim 06 January 2015 11:00:48PM 0 points [-]

So what you are basically saying is that in the long run the price will be driven close to the lowest average price -- right?

Yes; in the long term the producers that have higher-than-average Costs will be driven out of the market.

Still not quite, as once you recognize that "perturbations" will happen, you need to engage in some risk management (zero mean does not imply zero volatility). In your scenario the chicken producer seems to be fine with the 50% chance of going bankrupt at the delivery time which isn't a good assumption to make.

I'm modeling risk management as part of the typical Cost of doing business, along with things like interest rates, opportunity costs of capital, chicken feed, other inputs, etc. Separating out risk management as a stand-alone variable doesn't seem to change anything.

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