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I am reading a book on economics and it says that more supply equals less demand because people won’t pay a high price for things that are plentiful: "high supply will push prices down as consumers will not pay a premium for something that is plentiful."

But this just sounds a bit off to me. It seems kind of non-sequitur. Why would the supply of something increasing make me value a unit of that thing less? For the sake of example, let’s say I am willing to pay X amount of dollars for a certain type of car. But then the company manufactures 100 more of these cars. Why would I suddenly now value the car I wanted less just because the supply of them overall increased? I was still just going to buy one anyway.

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  • $\begingroup$ It should say high price, not high supply. $\endgroup$ Commented Aug 31, 2022 at 17:03
  • $\begingroup$ Or say "increasing the price will normally lead to more supply and less demand" $\endgroup$
    – Henry
    Commented Sep 1, 2022 at 13:10

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Your quote does not say "more supply equals less demand". The quote is about the market price, not any individual's subjective valuation of the good.

Say a muffin is worth \$5 to you. If there is a single muffin shop in your town selling the muffins for \$4, you will pay \$4, since this is below your 'willingness to pay' and you have no other muffin shopping options. If they were selling for \$3, you would pay that much; in fact, you would prefer this since you get to keep a dollar more. Mind you, in all these situations your 'willingness to pay' is \$5. This still means that if you can get the muffin cheaper, you will do so.

In most models the presence of other muffin shops will result in increased competition (increased supply) and hence the shops will lower their price, so that their competitors cannot profitably poach their customers.

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  • $\begingroup$ Basically, why would a consumer not pay a premium for something just because it is more plentiful? Or conversely, why would they be willing to pay a premium just because it’s not as plentiful? Why would the overall quantity/supply of something influence how highly I value a unit of that thing? $\endgroup$ Commented Aug 31, 2022 at 18:23
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    $\begingroup$ @AnthonyFallone I specifically wrote that your subjective valuation does not change. I added two sentences to emphasize this. $\endgroup$
    – Giskard
    Commented Aug 31, 2022 at 19:08
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The explanation in the book is overtly simplistic. Increase in supply actually lowers prices for multiple reasons not just by affecting people’s subjective valuation of the final margin good consumed (eg more supply usually means there are more sellers and hence more competition), but value of the margin good is affected as well.

This is because value depends on marginal utility. For example, nobody has an absolute value for water. In Sahara desert where there is no water a wandering water merchant can demand a small fortune for a cup of water.

However, the more cups of water you have the less you will be willing to pay for it. The first cup of water that saves your life will have huge value for you. The second might still be valuable, but the value of each next cup will start dropping rapidly. Whereas you might be willing to pay fortune for the first cup of water a 30th cup of water will have almost no value. If you are drowning in a middle of a lake additional cup of drinkable water would have absolutely no or possibly even negative value as more water would just bring you disutility.

This is because, generally speaking, people’s utility of consuming most products is (at least locally) concave. That means generally each additional unit consumed brings less benefit than the last one.

Note this does not mean people have less demand for the product. Demand is the relationship between price and quantity people want to consume. Something that is not very valuable (eg water in modern western city) might be demanded and consumed at high quantities.

Next the book is being too simplistic. Value of something just determines your reservation price/willingness to pay (highest price you would be willing to pay for a good). However, in competitive markets consumers usually pay less then their reservation price as competition between suppliers brings prices down further. Higher supply usually implies there are more competitors in the market (although not always as existing firms can just scale up production as well).

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    $\begingroup$ "Increase in supply actually lowers prices for multiple reasons not just by affecting people’s subjective valuation" Hey, are you actually claiming that the subjective valuation is also affected, i.e., the inverse demand curve is changed because of a shift in supply, or am I parsing this wrong? $\endgroup$
    – Giskard
    Commented Aug 31, 2022 at 16:57
  • $\begingroup$ @Giskard no I am not saying demand is affected, as you move along demand curve (holding demand fixed) the subjective valuation on margin decreases. As you for sure know demand curve can be derived even for a single individual with the market demand being the horizontal sum of individual demands. As we move to the right either on a margin existing people value the good less or there are new customers who also value the good less, I just choose to focus on the former in my answer not to add unnecessary confusion $\endgroup$
    – 1muflon1
    Commented Aug 31, 2022 at 17:06
  • $\begingroup$ I do know, but you write "subjective valuation of the good", not subjective valuation of the marginal good. $\endgroup$
    – Giskard
    Commented Aug 31, 2022 at 18:04
  • $\begingroup$ @Giskard right but you can also interpret it as value for the good decreasing. The individual demand function consist of persons reservation prices for different quantity. If at Q=1 P=2 that individual at consumption point Q=1 values the good at P=2, if we are at consumption point Q=2 with P=1 that means that individual values both units of the good at P=1 even though if he would be consuming only single unit of a good. In any case I adjusted wording a bit to make it clear I am talking about margins $\endgroup$
    – 1muflon1
    Commented Sep 1, 2022 at 7:42
  • $\begingroup$ "value depends on marginal utility" should actually be the other way round. $\endgroup$
    – VARulle
    Commented Sep 1, 2022 at 11:02

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