I made this. I hope you like it.
Micro Econ Micro Quiz
This is certainly NOT taught in mainstream Econ101, even though the math is simple. I suggest you actually try to solve it (no need to post the answer), and you will see what it is about.
This is not microeconomics
Eh. It's not like anyone with understanding of Capitalism needs explanation.
As for the rest, example is too bland, too cerebral, and too theoretical.
Why? Because you don't like the result?
The result that… You should sell half?
And what makes it different from usual econ101 questions about quantity and price is that we are not even talking about production costs and relating that to making and selling different quantities. The stuff already exists, and you make more profit by destroying some of the useful items to keep the supply scarce.
If you are dropping production then it means either, the product was not succesful, or a new, better one is replacing it, so how are you going to be able to sell them for the highest price?
Or some inputs are now unavailable. Or the inputs are still available, but have become so expensive that people won't buy that stuff at production cost anymore while also neither so expensive that the work required for getting them out of the stuff again is feasible. Temporary great weather conditions can be reason for some inputs being very cheap, temporarily.
I'm not sure about Econ101, but I distinctly remember Heyne's basic textbook on economy having this example. Something about not selling all the tickets to the cinema (instead discounts are recommended as a tactic to sell all stuff without lowering price for most customers).
I.e. segregating those capable of paying high price from those capable of paying only low price.
Maybe the example is unnecessarily complex. An example for this can also work with zero disposal costs. I could just have said: There are so many items in stock, here is a demand curve. If you have to sell any unit of the good at the same price, 1) what is the price you can sell all goods at and 2) what is the profit-maximizing price? The result would be, once again, that destroying some goods can be profitable.
The reason I put in disposal costs is that it gives another funny wrinkle to everything. When you talk with somebody who has completely bought into "common-sense" econ, and you tell him to imagine that disposal costs of some good go down, he would probably imagine that must be good news for consumers.
Paul Heyne? I haven't read him (or any other economist named Heyne) and I don't recall ever getting such an example in my econ books (Samuelson among others, though I have to admit that was over a decade ago). Yeah, I figured a way of avoiding all that destruction of goods, or at least some of it, is to avoid having one single price for every customer. Give people the impression there is much less stock left than you actually have, after selling to those willing to pay a high amount you wait a bit and then announce you "found" some more and sell that cheaper to the more stingy customers. That's not particularly unrealistic. But how does this square with generic notions of efficiency and fairness? I guess there is a reason for capitalism apologists, if they ever tell such a story, to focus on the viewpoint of the one doing the selling here.
This behavior still amounts to artificial scarcity through hoarding and delayed delivery. It means that markets give incentives to be very intransparent about how much you have in stock, with a bias towards under-reporting. I recently read about an online retailer doing just that. Maybe I'll find that article again and post a link tomorrow.
You should do it simpler.
You have ten crates of strawberries. There are ten potential customers that might buy strawberries while they are fresh. Each customer will buy only one crate.
You know that:
- One customer can pay $200 (or lower)
- Two customers can pay $100 (or lower)
- Three customers can pay $60 (or lower)
- Four customers can pay $30 (or lower)
Assuming strawberries are spoiled by the end of the day and has to be thrown away, what price should you set to get maximum profit?
If strawberries spoil only partially and customers that did not buy them initially would buy them next day, what price should you set during first day and what price during second day, assuming customers will pay only half the price for partially spoiled they would've paid for fresh strawberries?
It overcomplicates stuff and people don't like math.
Yep. Can't find his book online unfortunately.
Can't you use real-world examples?
Discounts for categories of people that are generally poor. War veterans, students, etc. You can even add fund of donations to "compensate" for discounts. Or timed discounts - cue barbaric fights between desperate customers in Walmart - that filter out sufficiently rich.
So what if you entre production with this in mind, and the goods taht are bound to be destroyed are made of lesser quality, or maybe they are just virtual goods?
wouldn't it be even more profitable to produce goods with this disposal cycle in mind?
Answer is $60 for a total of $360
That feels more complicated that the original. Eeeh, I think it's $100 on first day, $15 on second, for a total of $405.
That's rather silly. If you can't sell everything and production costs more the more you produce, hindsight tells the entrepreneur a lower quantity produced would have been better. People don't have perfect foresight and there are factors outside the power of the boss that influence how much gets produced, think about how much weather conditions matter when growing food.
Remove Challenge 3 so that you can actually trick people into some critical thinking here.
But that's the best part.
D'oh. Second answer was wrong. first day $60 times 6 customers for $360, second day $15 times 4 customers, so $420 in total To quote Engels, "Math is hard, let's go shopping!"
Follow-up riddle. Suppose the strawberry crates are put up for a series of auctions, each auction happening on the first day. All the potential customers who show up at the auction are those already mentioned in the original strawberry story, with the preferences mentioned there. A common analytical simplification in economic modeling is that people have perfect knowledge about each other and can co-ordinate at zero cost. Suppose this is true for the potential customers and they coordinate among themselves, with promises they make to each other never broken. How much do they pay and how many crates are sold?
Follow-up riddle to the follow-up riddle: Suppose the situation is different from the above in that there is another potential customer who also only wants one crate, and is willing to pay up to $25 (and like the others he always prefers to pay less if he can get away with it, of course).
Bro-Tip: To defeat the auctioneer, shoot at him until he dies. It helps to think about Vickrey auctions. In a normal auction, also called an English auction, people bid more and more, and the highest bidder wins. In a Dutch auction, the price falls over time until one person accepts that bid.
Suppose an auction is silent. People provide information about their maximum bids in sealed envelopes, and we use that information to instantly determine the winner. If we declare the highest maximum bid the winner and that amount is what the winner pays, that's the instant-version of the Dutch auction. The Dutch auction is not strategy-free because it can be beneficial for a bidder to have a good idea how much the others are willing to bid.
To get the instant version of the English auction, which is called a Vickrey auction, you make the person with the highest maximum bid the winner, but he only needs to pay the amount necessary to just beat the second-highest bid. This means the work and risks of strategizing is taken from the bidders. (Strictly speaking, this notion of being strategy-free abstracts away some issues: bidders being concerned about resale value in their own evaluation and troll bidding because you want somebody to pay more.)
Now try to generalize the Vickrey auction to multiple units of the same kind of item, when each bidder wants one unit max. This leads to the answer.
When one unit of a thing is auctioned off, the winner must only beat the second-highest bid. If two units are auctioned off with no single person getting more than one unit, to get one unit you only have to bid higher than the third-highest bid. And so on. So if there are K units and you look at a ranking made from the sealed maximum-bid statements, you know the K highest bidders will all each get an item. And how high does your bid have to be to get into that set? It just has to be higher than the bid ranked below the lowest in the set of people who get stuff. So the bid at rank position K+1 determines what amount your bid must beat in order to count.
So, the K highest bidders win and, to take the burden of strategizing from them like in the normal Vickrey auction, the amount they pay is just what's necessary to beat the highest non-winning bid.
What does it mean for the scenario with ten potential customers? There are ten crates and there is no person number eleven, so if the consumers coordinate their shit they only have to pay the minimum amount over zero.
And in the scenario with the additional bidder with the $25 maximum, doing this generalized Vickrey auction would result in the other ten people each receiving a crate for just above $25 for each crate. But is that really the answer?
If the new bidder doesn't co-operate with the other ten bidders, they have to bid higher than him to get their crates. One crate of strawberries isn't worth more than $25 to him, and if he doesn't co-operate, that means the other bidders taken together have to pay over $250 to the auctioneer instead of minimally above zero. So, they can try to get the new guy to co-operate by paying him just over $25 to make him abstain, and if that works out, they end up paying only slightly over $2.50 per person for the crates.
Sooo, what's the purpose of all this:
In the real world, permanently fixing one price for a good and destroying an over-supply is a possible choice (stuff that quickly perishes, perhaps), but probably the more common choice for the supplier is segmenting the market. Destruction of useful goods counts as evidence for capitalism's irrationality; the alternative, and I believe far more common decision, of segmenting the market to offer the same good at different prices is not evidence for capitalism's rationality either. Since if consumers were really well informed and acted in a well-coordinated self-interested fashion, how could the supplier get away with charging vastly different prices for the same thing.
Some procedure like the generalized Vickrey auction could work very well in a socialist system with electronic consumption tokens that are not transferable between individuals and closely monitored, which would make it much more convoluted and risky for suppliers to put up high-but-not-highest fake bids to increase revenue* as well as for bidders to bribe other potential bidders to abstain from bidding to decrease what they pay.
*And that's not even considering that how much a thing sells for relative to its production cost would play less of a role in planning production. Instead of it directly influencing how much is produced of what, it would only be a data point for consideration. Consider e.g. data about how much of some alcoholic beverage is sold. That would matter in comparison with data about other alcoholic beverages, but the general plan could have limits about aggregate production of alcoholic beverages, decided by deliberation. The meaning of the very word "revenue" would be different from current accounting practices. A firm having much higher "revenue" data than costs would have a good argument at hand when talking with planners about expanding, it wouldn't really directly get that revenue by selling to obtain resources as they see fit for the particular thing they are doing at that moment or expanding into something else entirely.
if the less I sell the more it costs, can I sell 0 for infinite money? economists btfo
Thanks for bumping the thread. But at what cost.