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» The Ornery American Forum » General Comments » Supply, Demand, Stimulus

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Author Topic: Supply, Demand, Stimulus
philnotfil
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I know that we have people here with a vastly superior understanding of economics than I do, so I wanted to post this and make sure that I'm understanding it correctly.

Stimulus can be applied to the supply side or the demand side, but doing both at once is counterproductive.

Stimulus should be applied to the supply side when supply can't keep up with demand, indicated by increasing prices (primary indicator of supply not meeting demand) and increasing interest rates (secondary indicator showing that businesses are trying to borrow more money than is available to meet demand for their goods or services).

Stimulus should be applied to the demand side when demand is lower than supply, indicated by dropping prices (primary indicator of demand not meeting supply) and dropping interest rates (secondary indicator showing that money is available, but businesses are not borrowing money because they have met the demand for their goods or services).

A caveat that rising or falling prices should be due to supply/demand, not technological advances. The price of computers dropping because technological advances make them cheaper is different from the price of computers dropping because no one wants to pay the current price.

Am I understanding this correctly?

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philnotfil
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No one is responding because this is correct? Because it is so far off that there is no hope for me? Because no one knows what the answer really is?
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Pyrtolin
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That seems decent, with the caveat that, on the balance, some pressure should remain on the supply side, because it's that pressure to keep up with demand that drives innovation and directs the market toward what the overall population actually wants to have produced.

The other factor is, similar to prices dropping because of technological innovation (which is a net good), prices and interest rates can rise because of financial manipulation and the resultant profit margins (which is a net bad). In which case, active action needs to be taken to bring the financial sector back into a role of a monetary utility with tighter margins, rather than letting it serve as a money sink while productivity and real growth are neglected.

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JWatts
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I wouldn't claim an expertise. But I do have a BS in Finance, which is enough to give me a some knowledge and to ensure I realize how much I don't know. [Wink]

However, your statements seem reasonably accurate.

This statement seems a little off target:
quote:
Stimulus can be applied to the supply side or the demand side, but doing both at once is counterproductive.
Our current recession is suffering from a lack of AD (aggregate demand). So most of the stimulus has been directed at stimulating demand. It's not so much that doing both is counterproductive as it is that supply side stimulus is unnecessary in this case.

Some of the stimulus has been directed to the supply side, but this has all been for specific reasons. Propping up failing car companies, boosting 'green' companies, etc. None of this was directly useful for countering the recession, but was indirectly useful. Propping up the car companies kept the auto workers employed, which kept unemployment lower than it would have been and the 'boosting' green companies creates additional jobs. The intent in both cases was not so much to stimulate production as to stimulate employment and thus demand.

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Pyrtolin
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I'd also add that part of the point behind boosting green jobs was to reduce oil dependence as a limiting factor on economic growth on both sides of the column. Oil energy is one of out biggest limits at the moment, and the more we can reduce it, if not outright eliminate it, the more effective any kind of push will be.
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JWatts
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Agreed mostly, but a significant chunk of the 'green' money went to solar, wind, building insulation, etc which don't effect oil usage at all. I do agree that reducing our oil imports and thus our trade deficit would enhance economic growth.

[ September 16, 2011, 12:49 PM: Message edited by: JWatts ]

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philnotfil
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quote:
Originally posted by Pyrtolin:
That seems decent, with the caveat that, on the balance, some pressure should remain on the supply side, because it's that pressure to keep up with demand that drives innovation and directs the market toward what the overall population actually wants to have produced.

By some pressure you mean that supply side stimulus shouldn't completely meet the needs of the supply side?
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Pyrtolin
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quote:
Originally posted by philnotfil:
quote:
Originally posted by Pyrtolin:
That seems decent, with the caveat that, on the balance, some pressure should remain on the supply side, because it's that pressure to keep up with demand that drives innovation and directs the market toward what the overall population actually wants to have produced.

By some pressure you mean that supply side stimulus shouldn't completely meet the needs of the supply side?
Right. Production should always feel the pressure to reduce costs or offer improved value, otherwise it will default to trying to entrench itself, the way oil has because we've done so much to shelter ourselves from the real costs of using it.
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Pyrtolin
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quote:
Originally posted by JWatts:
Agreed mostly, but a significant chunk of the 'green' money went to solar, wind, building insulation, etc which don't effect oil usage at all. I do agree that reducing our oil imports and thus our trade deficit would enhance economic growth.

Oil (as well as natural gas, and even coal, which, for the purposes of referring to "limited energy resources" are interchangeable here) is used for heat in many homes as wells as electricity generation. And the move toward electric vehicles crates at least one strong path away from oil dependence for transportation.
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JWatts
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quote:
Originally posted by Pyrtolin:
Oil (as well as natural gas, and even coal, which, for the purposes of referring to "limited energy resources" are interchangeable here) is used for heat in many homes as wells as electricity generation. And the move toward electric vehicles crates at least one strong path away from oil dependence for transportation.

Oil is not used for electricity generation to any significant extent in the continental US.
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Star Pilot 111
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I have a question.

Does the creation of jobs have to do with the consumers?

Example:Someone has a product and more and more people buy it. So the company has to hire more and more workers to produce it, to keep up with the demand.

The company hired the workers. But didn't the jobs come about because of the consumers?

If the comsumers don't have the money to spend and don't buy the product, there's no need to hire people.

Isn't that the situation we're in now? Does that make sence?

I don't know much about the science of ecomomics, it's terms and phrases. But doesn't the consumers purchase power create or eliminate the need for jobs?

Someone please let me know if this is true or not. If you can, explain it simple. Please be nice.

If this is true why do they want to give companies more money when the comsumers need the money to by the products?

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Pyrtolin
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quote:
Originally posted by JWatts:
quote:
Originally posted by Pyrtolin:
Oil (as well as natural gas, and even coal, which, for the purposes of referring to "limited energy resources" are interchangeable here) is used for heat in many homes as wells as electricity generation. And the move toward electric vehicles crates at least one strong path away from oil dependence for transportation.

Oil is not used for electricity generation to any significant extent in the continental US.
Many homes use oil or gas directly for heating. They could as (even more, in the case of oil, which required a large purchase once a year) easily use electricity were a cheaper, more renewable option. Similar with electricity instead of gas in cars. The fact that oil isn't used for generation directly doesn't mean that devices that use electricity can't replace those that use oil.
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Pyrtolin
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quote:
But doesn't the consumers purchase power create or eliminate the need for jobs?
Very explicitly yes. The entire foundation of capitalism is that people can specialize in producing things that they perceive others as wanting, and then exchange them for things that they aren't as capable of producing (or for money as a debt against a future transaction) Consumers drive our economy; jobs exist to try to anticipate and meet their needs, with profit being the reward for proper anticipation.
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JWatts
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quote:
Originally posted by Star Pilot 111:
Someone please let me know if this is true or not. If you can, explain it simple. Please be nice.

No need to explain anything more, you've got it right.

quote:
Originally posted by Star Pilot 111:
If this is true why do they want to give companies more money when the comsumers need the money to by the products?

Mostly political reasons. Union jobs, green jobs, government jobs, etc. All are politically powerful constituencies that get rewarded for being such.
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Pyrtolin
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quote:
Originally posted by JWatts:
quote:
Originally posted by Star Pilot 111:
If this is true why do they want to give companies more money when the comsumers need the money to by the products?

Mostly political reasons. Union jobs, green jobs, government jobs, etc. All are politically powerful constituencies that get rewarded for being such.
All of the groups you list also happen to be consumers, not companies as Star Pilot was asking about. When you employ people at middle class wages, you strengthen consumers.

Corporations, on the other hand, only spend more when they predict that there are more consumers to appeal to. Giving them more money without priming consumer demand just means more profits for people whose propensity to consume is already saturated.

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