I’m currently taking an Economics course, EC 205: Fundamentals of Economics, a self-paced correspondence course through the Friday Center. Why? Because over the past few years economics has become an increasingly major part of my evaluation-related research: return on investment, cost analysis, etc. And for most of the time I’ve been working in that arena I’ve relied heavily on Lori‘s Econ chops. But now that she’s moving onward and upward to a dissertation proposal, I figured that if I want to continue this line of research (and I do), I’d really better know something about Economics myself, beyond what I’ve absorbed by osmosis.
While I’ve been reading the textbook, I’ve been making notes about questions and ideas that occur to me. I’ve been making these just for myself, in a Word file, for a while now. But it occurred to me that this blog is a better place for these. Partly because I’m trying to contribute to the blog more. And partly in the hope that I may get answers, or at least comments, in reply to some of these questions, which will help me understand these issues better. That said, dear reader, please bear in mind that this is an introductory Econ course that I’m taking, so these questions may be incredibly stupid or naïve. Give me credit for being brave enough to potentially look foolish in public.
First, demand curves. The textbook discusses the hypothetical of a perfectly inelastic demand curve: where demand is constant regardless of price. But what about (the hypothetical?) of a perfectly elastic demand curve: where price is constant regardless of demand? Actually, since I first jotted this note down, I’ve since read about price taker firms, which have a perfectly elastic demand curve at the firm level (the firm must take the market price for its good), though the demand curve at the market level is subject to more normal price elasticity. So I suppose I’m asking about perfectly elastic demand in a market. Wouldn’t this basically be the model of filesharing? Wouldn’t price necessarily be driven to 0, & we’d be in the environment of Chris Anderson’s Free? A perfectly inelastic demand curve would converge on price = infinity, a perfectly elastic demand curve would converge on price = 0.
On a related note: demand elasticity. Under what conditions would demand be less elastic, or even equally elastic, in the long term than in the short term? Only, it seems to me, when substitutes for a good disappear over the long term. Which seems pretty unlikely.
Next, equilibrium. Buyers can go out & purchase stuff more or less in an instant. But it takes some time for producers to acquire or build new stuff, longer for more complex stuff. So supply always lags when demand increases. But this is only the case when the market is for physical goods or services. When the market is for information “goods,” producers can duplicate as many copies as demand calls for. Take, for example, the iTunes store: if suddenly a song becomes popular, 80 jillion users can download it as easily as one. So I would hypothesize that markets for information should reach equilibrium faster than markets for other types of things, in fact instantly. In fact, markets for information should never be out of equilibrium.
Taxes. My textbook (as I imagine most textbooks do) discusses taxes as if they’re a sum of money. Which I suppose is how people usually think of taxes. But it seems to me that a tax can be any force that is a disincentive to trade, “friction” as it was called in a study I was involved in as a PhD student. I’m thinking specifically of the difficulty for the buyer of reaching the seller: distance, time to close the sale, aversion to smarmy salesman, etc. So anything that increased friction would have the effect of a tax, while anything that decreased friction would have the effect of reducing the burden of taxation. The internet, by making both buying and selling easier, should reduce the burden of “taxation”, even if online sales were monetarily taxed. And the fact that many online sales are not taxed should reduce it even more. Are there any studies on this?
I have more, but that’s enough for now. Back to actually reading my Econ text.
One thing to look at is the notion of Deadweight loss, which is the loss of welfare caused by markets failing to reach equilibrium due to factors such as taxation.
A great reference/textbook is Mueller’s “Public Choice III”; there are two physical copies as well as full-text (yay) from ebrary (boo). @UNC Libraries
Repeat of last link: http://search.lib.unc.edu/search?N=0&Nty=1&Ntk=ISBN&Ntt=0521815460