Episode #125 of the Stack Overflow podcast is here. We talk Tilde Club and mechanical keyboards. Listen now
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Yes, customers who were exposed to day-ahead wholesale market prices were paid to use electricity. It is a combination of several different factors that make the day-ahead wholesale electricity market special. Firstly, very few electricity consumers participate in it directly. So the demand side is very illiquid, with very low short-run elasticity - and it ...


16

Gary Becker's work on Social Demand probably has something to do with the phenonmena. Becker basically asked why some popular places consistently seemed to underprice their goods. For example, concerts often sell out very quickly and fancy restaurants in the middle of a busy suburb might be often crowded. These venues could raise their prices, but the basic ...


13

You sometimes find textbooks drawing the supply and demand curves as concave upwards, as such: The straight-line supply and demand curves can be thought of as a magnification of this graph, where the two intersect. Thus, the units on the axes would give you a clue as to how high up the graph is being drawn, or how far to the right (if the units start at a ...


12

The book Information Rules by Google Chief Economist Hal Varian (with Carl Shapiro) deals with many issues raised by the particular features of the digital economy. In general, he finds you don't need new models, and that things are well approximated by high fixed and low or zero marginal cost of production.


10

Consider the Slutsky equation, $$ \frac{\partial x}{\partial p} = \frac{\partial x^c}{\partial p} - \frac{\partial x}{\partial I} x. $$ A giffen good is the case where the income effect $\frac{\partial x}{\partial I} x$ is negative and large (in magnitude) enough so that $\frac{\partial x}{\partial p} > 0$. From Wikipedia: There are three necessary ...


10

Black Friday is a marketing event that benefits from network effect . The more stores offer products for lower price and the more consumers know about them, the greater is the network effect. Normally when you put your product on sale at reduced price, you have several problems to deal with. Your target consumers need to be informed of your offer and they ...


10

Though the Black Friday savings do exist, they are less significant than in some of the early years when the "Black Friday" sales were just starting to get really popular. Raising prices is one way that merchants could try to respond, but then they might exclude the deal-seekers whom they are targeting. Instead, merchants have been doing other things. ...


9

There is rather low probability for demand of a good to exhibit the Giffen property at market level, where averaging over heterogeneous preferences, different income levels and consequent differentiated behavior, will usually offset Giffen phenomena. Looking at @jmbejara answer, goods that are likely to satisfy all three necessary conditions are drugs ...


8

tl;dr: it's basic engineering: efficiencies improved between 1970 and 2010. Additionally, net USA imports increased from 0.75 trillion cubic feet in 1970 to 3.8 trillion cubic feet in 2007 I think there may be some misunderstandings. Firstly: the first chart shows domestic gas production. "Domestic" doesn't refer to residential-only use - it just means ...


8

The kinds of practices you describe are frequently controlled through competition/antitrust policy. For example: In the US conspiratorial agreements (such as price-fixing cartels, bidding cartels, or other agreements that restrict competition) or conspiring to abuse a position of dominance in a manner that harms competition is illegal under the terms of the ...


8

Here's a "no maths" explanation (including the inferior goods case, because I think it helps to understand what's going on): Suppose we have a normal good, $x$, and we increase its price. Marshallian demand decreases thanks to two effects (i) consumers substitute away from $x$ towards cheaper alternatives; (ii) because prices are higher, consumers can ...


8

A price-taking firm takes prices as given, but that does not mean that the firm cannot influence prices; it just means that the firm ignores its own impact on prices. Now the question is how sensible it is to assume that firms take prices as given. The usual view is that it is a reasonable assumption when the impact of a firm on prices is small enough ...


8

It is possible. We normally think demand and supply are more elastic in the long run because consumers/firms have more options in the long run. For example if gas becomes more expensive consumers can buy more more fuel efficient cars. So what if consumers or firms are more constrained in the long run? This could be the case when goods are storable. ...


8

Your broad idea is right. Since the marginal cost of reproducing digital goods is essentially zero, there is a sense in which is appears optimal to give the good to any consumer who has a positive value for it. In this sense, such goods are superficially non-scarce. However, there are some important caveats to this line of reasoning that results in the goods ...


7

When the USD is highly valued, it allows people from the home country, the United States in this case, to purchase goods relatively cheaply from abroad and put pressure on domestic firms to have low prices. From a consumption standpoint, this may be advantageous. A high value USD may also make goods from the United States more expensive relative to goods ...


7

We cannot obtain "demand" in the usual sense, because demand is a random variable. The "best" we can do is first, to obtain the Conditional Expectation of individual demand (conditional on the variables that determine the probability of whether the consumer will demand/buy). Let a situation where consumers decide to buy or not to buy a single (for simplicity)...


6

The usual textbook example of a Giffen good (i.e. a good whose demand curve slopes upwards) is the Irish potato famine. The idea is that as potatoes (a staple food) became more expensive, people could no longer afford expensive foods such as meat and so ended up buying more potatoes! However, this example has come in for criticism, not least of all because a ...


6

The observation that "as stock prices rise people tend to buy more of it, so here the "law of demand" holds in reverse", is one of the more widespread misconceptions related to economic thinking. To expand on @StevenLandsburg comment, the "demand curve" (or "schedule") describes a static relation between the quantity of a good and its price. Its quality (...


6

In a sense, I think the right question is not "why do firms offer a discount" (or, as you put it, why do smart firms not "react by increasing all of their prices in response to demand?") Rather, the interesting question is why do firms ever not discount their prices? After all, if consumers can shop around for a good deal then one would expect that all but ...


6

I believe that I have found the problem in this line: I don't understand why price has to increase if quantity increases. The concept is actually the other way around. Think of it in the same way as the Law of Demand. If you go to the grocery store and you see a food that you like selling for \$.25/lb, you would buy a whole lot of it before the price ...


6

Partly your question relates to more general questions like "buy versus rent a house", or "buy versus lease a machine". Under neoclassical assumptions of competition, full information, etc, you can imagine that arbitrage would make these options equivalent for the average of the population (or the representative agent). In practice, heterogeneous ...


6

Here's a quick and dirty trick: DWL is the triangle that points (horizontally) towards the efficient quantity. If equilibrium quantity is lower than the efficient quantity, DWL should point rightward, and it represents the amount of unrealized gains from trade. If equilibrium quantity is higher than the efficient quantity, DWL should point leftward, ...


6

It is perfectly consistent for the marginal revenue to increase in $q$, even if the demand curve decreases. Marginal revenue is $$p(q)+ q p'(q).$$ The first term says "if I sell one extra unit then I will receive an extra $p$ in revenue". The larger is this effect, the higher is the MR. The second term says "in order to sell one extra unit, I will have to ...


5

You are describing a market where a "non-storable" (or "perishable") good is traded. This is the (in terms of historical precedent) model of a market, since in the old days, most goods were agricultural, and many amongst them were "non-storable". The argument behind "market clearing", i.e. that prices will adjust so that all quantity available will be ...


5

The MC curve can only be seen as a supply schedule for the individual firm if it is a price taker. In the case you depicted, however, we have imperfect competition. A profit-maximizing firm will thus produce where MR=MC, and charge a price that will induce consumers to purchase this quantity (which can be read off the demand schedule). In this sense, there ...


5

We have that $$D(p^*,\mathbf{a}) = -\frac {d}{dp^*}\int_{p^*}^\infty\!D(p;\mathbf{a})\,dp,$$ $$\Rightarrow \text{PS}(p^*) = -\text{CS}'(p^*)p^* \tag{1}$$ So $$\text{PS}(p^*)= \text{CS}(p^*) \Rightarrow -\text{CS}'(p^*)p^* = \text{CS}(p^*)$$ or $$\text{CS}'(p^*) + \frac 1{p^*}\text{CS}(p^*)=0 \tag{2}$$ which is a first-order linear homogeneous ...


5

You can imagine a demand curve continuing through the x-axis as monetary price becomes negative. A negative price can be interpreted as payment to pick up shirts, a kind of subsidy.* That might tempt those who are still unwilling at price of zero because there's still a opportunity cost of picking up the shirt, or because they only wear collared shirts, or ...


5

Let $v_i$ be the valuation that the $i$-th consumer has for the product, and $v^*$ the common valuation of the product, where the $v$'s are measured in monetary units, and are assumed continuous. Consumers are here assumed binary -they either purchase $0$ or $1$ (i.e. the product is indivisible). We assume that if the valuation is equal to the price, they ...


5

Suppose the marginal cost is constant and equal to $c$, that fixed costs are $K>0$, and that revenue is $R(q)$. You seem to understand that MR=MC must be true for profits to be maximized: $R'(q)=c$. We also know that average costs are given by $AC=(K+qc)/q$. But note that $AC=(K+qc)/q>c=MC$. Thus, when profits are maximized we have $AC>MC=R'(q)$. So ...


5

Recall the following equivalent definitions for luxury goods and necessities: A good $x$ is considered a necessity if $e_{(x,I)}<1$. A good $x$ is considered a luxury good if $e_{(x,I)}>1$. As you can see, these definition do not encompass all possible scenarios, so any specific good does not have to be either a luxury or a necessity. In the case ...


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