Behav­ioral Finance Lec­ture 02: Debunk­ing Demand and Sup­ply Analy­sis

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In the first half of this lec­ture, I show that even if all con­sumers were util­ity max­i­miz­ers whose indi­vid­ual demand curves obeyed the “Law of Demand”, the mar­ket demand curve derived from aggre­gat­ing these con­sumers could have any shape at all. This result, known as the “Son­nen­schein-Man­tel-Debreu Con­di­tions”, is actu­ally a Proof by Con­tra­dic­tion that mar­ket demand curves do not obey the “Law” of Demand, and there­fore that Mar­shal­lian par­tial equi­lib­rium mod­el­ing of indi­vid­ual mar­kets is invalid–let alone the Neo­clas­si­cal prac­tice of mod­el­ing the entire macro­econ­omy as a sin­gle agent in “Dynamic Sto­chas­tic Gen­eral Equi­lib­rium” mod­els.

In the sec­ond half, I show that even if the mar­ket demand curve were valid, sup­ply and demand analy­sis is still impos­si­ble. A sup­ply curve that is inde­pen­dent of the demand curve can only be derived if firms set price equal to mar­ginal cost, which neo­clas­si­cal econ­o­mists claim is the con­se­quence of profit-max­i­miz­ing behav­ior by com­pet­i­tive firms. I show: that equat­ing mar­ginal cost and mar­ginal rev­enue does not max­i­mize prof­its; that there­fore if firms from dif­fer­ent indus­try struc­tures faced the same costs, the amount pro­duced is inde­pen­dent of the num­ber of firms in the indus­try and cor­re­sponds to the so-called “monop­oly” level of out­put. In this case, a sup­ply curve can­not be derived.

Here are the Pow­er­point files for this lec­ture:  Part 1Part 2.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Lyon­wiss

    Alain­ton August 17, 2011 at 9:32 pm

    You said: “… not invest­ments – no equity involved”. Are you say­ing invest­ing in bonds is not invest­ment? Even if you don’t accept Modigliani-Miller, I see bank extend­ing credit to busi­ness as invest­ment.

  • sir­ius

    @Lyonwiss

    Police state: arbi­trary and repres­sive appli­ca­tion of the law,”

    I too noticed the sit­u­a­tion where I found that the Prime Min­is­ter of the UK was call­ing for the JPs to break the law. I saw it as just part of the slide — and a fol­low­ing of Amer­ica.

    I noticed too that Cameron(g) had asked some­body from New York to come and man­age the UK sit­u­a­tion regard­ing “gang con­trol”.

    I regard incite­ment to break the law by instruct­ing the JPs to “throw away the rules” as break­ing of the “socio-eco­nomic” con­tract that is sup­posed to be a core of good gov­er­nance.

    I con­trast the recent loot­ing in the UK with the UK MPs “expenses scan­dal”. That scan­dal was when a num­ber of MPs had claimed thou­sands of pounds in addi­tional expenses that they were not enti­tled to.

    Was this a tiny num­ber of MPs? I seem to remem­ber that it was about 150 of them. I see this as hypocrisy of the high­est order. Hiow many MPs were even tried? About 1 or 2. What the MPs did was clearly law-break­ing. How­ever the law was “relaxed” in a dif­fer­ent direc­tion for them.

    Notice how the molasses do noth­ing ?

    Maybe we should thank the UK loot­ers?

    Is it not true that all the repairs and renewal of stolen and dam­aged stock result­ing from the loot­ing of shops in the UK will boost GDP and hence “eco­nomic growth”?

    I am being seri­ous here. This is likely to have have a pos­i­tive impact on GDP.

    The loot­ers are going to be forced to “repay soci­ety” — here I see some other flaws given the man­ner in which that be sug­gested to be done.

    Some­body some­where said that if money can fix a prob­lem then it is not really a seri­ous prob­lem.

    Last night on UK news it was reported that Bank of Amer­ica are going to with­draw from the UK credit card busi­ness which will involve 4,000 redun­dan­cies (unless some other shark wishes to buy the “busi­ness”).

    I expect the slide to con­tinue

  • sir­ius

    @Alainton

    “Yes – If you have invested into Ever­green Solar they have invested sev­eral hun­dred mil­lion into a fac­tory which is use­less because it is too high a cost. But only bad for their sup­pli­ers if they were not paid through advanced credit.
    ””

    I dis­agree with you here but this is a prob­lem when the only thing one con­sid­ers is “money num­bers” and not other more qual­i­ta­tive fac­tors.

    I would to write a small book on this spe­cific mat­ter and then present it to you but alas I have given up try­ing to get a more “holis­tic?” mes­sage across.

    I think I can make a very sig­nif­i­cant case (cer­tainly not on this blog for­mat) and then maybe you would “get it”.

    I have some of the best things come from mak­ing “losses” in life.

    With respect.

    And not lonked to my mes­sage but sim­ply “for inter­est”.…

    GS solar pan­els
    GS Solar will install the pan­els on IKEA stores in Cardiff, Edmon­ton, Edin­burgh, Glas­gow, Mil­ton Keynes, Not­ting­ham, Southamp­ton, War­ring­ton, Wednes­bury and Wem­b­ley.
    The retailer has also bought a 12.3-megawatt wind farm in Huntly, north­east Scot­land to help build up its renew­able port­fo­lio.
    IKEA now owns 67 wind tur­bines across its busi­ness pro­vid­ing 127 megawatts of capac­ity.
    http://www.building.co.uk/technical/sustainability/gs-solar-bags-£4m-ikea-solar-panel-deal/5022696.article

    I also found out today in my local super­mar­ket that “The Co-oper­a­tive” is one of the largest (inde­pen­dent) investors in renewal energy.

  • sir­ius

    @Cyrusp

    OT

    See­ing your name reminds me…

    I am read­ing an arti­cle in National Geo­graphic (august 2008) about Iran/Perisa. In that arti­cle it men­tions a king named Cyrus and also a cylin­der…

    http://www.newworldencyclopedia.org/entry/Cyrus_cylinder

    I am find­ing that Per­sia has a very inter­est­ing his­tory with appar­ently an empire that spanned 1,000 years. It is said that the cylin­der read as a call for reli­gious and eth­nic free­dom — some­thing which early Islam also did and like so many things has changed from its orig­i­nal intent…

    http://www.bbc.co.uk/programmes/b012rylw

  • alain­ton

    @sirius

    No knock some­thing out half a dozen pages would do

    Even mal­in­vest­ments can have knock on ben­e­fi­cial con­se­quences for the wider econ­omy — I can think of gol­drushes that have ended reces­sions even though none of the incom­ing min­ers made a dime.

  • sir­ius

    @Alainton


    Even mal­in­vest­ments can have knock on ben­e­fi­cial con­se­quences for the wider econ­omy – I can think of gol­drushes that have ended reces­sions even though none of the incom­ing min­ers made a dime.

    Thank-you for your under­stand­ing.

    I may be tak­ing a risk by say­ing that (ture) gov­ern­ment should “sub­sidise” one indus­try that needs to have a future when it is known that an exist­ing indus­try can­not be sus­tained. I am clearly think­ing the sub­ject of energy here.

    Con­sider
    1) Being able to extract energy from the ground with lit­tle real phys­i­cal effort but that must come to an end.

    2) The age of the dinosaurs appar­ently spanned some 160 mil­lion years. What is the times­pan of man ? What is the times­pan of the age of oil ?

    3) Petrol and diesel are taxed at the rate of some 260 per-cent (that has var­ied depend­ing on the year. (I believe that there was a “an annual fuel tax accel­er­a­tor” that increased the tax rate year-upon-year). Clearly the UK “gov­ern­ment” is con­trol­ling a major mon­e­tary flow and could direct this to very use­ful things.

    I have no doubt that the UK (and US) pop­u­la­tion in gen­eral will need to be dragged scream­ing from their cars rather than walk and be edu­cated as to the true value and nature of energy. 

    Per­son­ally I have found “energy” to be one of the most reward­ing stud­ies I have ever made (and con­tinue to make).

  • sir­ius

    From the link posted ear­lier…
    http://www.dailymercury.com.au/story/2011/07/31/hsbc-to-announce-more-than-10000-job-cuts/

    as it seeks to tap the fast-grow­ing Asia Pacific mar­ket.

    Freudian slip ? This really does con­jure up the image of a par­a­site tak­ing its gigan­tic sucker — hav­ing sucked the life out of one host — now mov­ing onto another host. Glob­al­i­sa­tion == global par­a­sites ?

    Freudian slip -
    A ver­bal mis­take that is thought to reveal a repressed belief, thought, or emo­tion.

  • Speak­ing of “idiots”:

    Why Mod­ern Democ­racy Is For Idiots

    Did you know that the word ‘idiot’ is actu­ally derived from the ori­gins of democ­racy in ancient Greece? Thou­sands of years ago, a Greek cit­i­zen who demon­strated dis­in­ter­est in pol­i­tics was labeled ‘idiotes’; it lit­er­ally meant ‘pri­vate per­son,’ which curi­ously enough was a term of deri­sion at the time.

    Fast for­ward to the piti­ful excuse we have for a demo­c­ra­tic process in the world today, and the oppo­site is now true: you have to be a com­plete idiot to invest your­self in these pol­i­tics.”

    http://www.zerohedge.com/news/guest-post-why-modern-democracy-idiots

    @ Sir­ius August 18, 2011 at 6:37 am | #

    Essen­tially the HSBC was born in the for­mer British Colony of Hong Kong from the money it made hav­ing the British Navy ship pro­tect the ship­ping of Opium from India to Macau where it was traded for Bul­lion. As this was a free ser­vice, it was much safer and cheaper than the tra­di­tional over­land route.

    I believe that HSBC was also the first Bank to be allowed to re-open in China after the “Mad Cow”, Thatcher, gave the British Colony back to China for free; after she got drunk in the Great Hall of the Peo­ple and fell down the steps. Typ­i­cal incom­pe­tent politi­cian and “leader”. And then she sold out 6 mil­lion British cit­i­zens by refus­ing to hon­our their British Pass­ports.

    It seems that — like every­where else, “lead­er­ship” wants to guar­an­tee is demise by bring­ing on odes of Mns. Guil­lo­tine and Cameron and Co. are no excep­tion.

    Mad­ness and stark insan­ity methinks, but I also believe that HSBC also has the most bank out­lets where most are through­out Asia, already. And as I have said numer­ous times. the future human activ­ity will be on and around the date line between Perth and Vladi­vos­tok.

    Aus­tralia, with its so astute and elite “lead­er­ship” (jail­ers) is intent to sup­ply the labour to For­eign Cor­po­rates for dig­ging the holes, as well as sup­ply­ing the dirt with its docile and “idiot” con­victs.

    Maybe the UK still does the con­vict trade to its Aus­tralia Penal Colonies?

    http://verbewarp.blogspot.com/2006/03/warning-to-east.html

  • RJ

    I have no doubt that the UK (and US) pop­u­la­tion in gen­eral will need to be dragged scream­ing from their cars rather than walk and be edu­cated as to the true value and nature of energy.”

    There are plenty of green sites to post this sort of non­sense Sir­ius. Govts invest­ing in crap alter­na­tive energy com­pa­nies is a total waste of good money. That could be used for exam­ple to pay the unem­ployed more etc.