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What Holds Up Prices?

Price formation often seems steeped in mystery.  “Seeing what the market will bear” is a mantra for many, but why would we want to leave prices to chance if we could avoid it?

What supported the prices for 2013 electric cars?  As shown below, we could make a statistically significant (9.3E-09) estimate of prices using a surface running through the 18 electric car models (as green spheres) that made up the market that year.  That surface reflects that after buyers paid about $6,500 to enter the market, the Price went up $102 for every horsepower and $172 for every added mile of range (P-Values, 0.00038, 4.19E-07, respectively).  Models priced above the surface may be overpriced, those below may be under-priced, or some other significant Features may be at work.

The diagram & the market math behind it demonstrates the first 2 adages of the Law of Value and Demand, which are:

  1. Product Features (as horsepower, range) determine Value
  2. Value determines Price

The green region is Value Space.  How does it relate to Demand?  Read the next post for an answer.

#prices#value

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The Demand For Money

Well, that’s an odd title, I’ll grant you that.

Really, what we’re addressing here is the demand for fiat currency.

Recall in previous posts we found Demand Frontiers for multiple markets. Sometimes these curves have breaks. Such is the case for fiat currencies. As shown in the diagram, this market has an Upper Demand Frontier and an Outer Demand Frontier.

Upper Demand Frontiers emphasize the price-limiting boundary for a market, while Outer Demand Frontiers focus on the quantity-limiting ability of a market to absorb the product. These boundaries help countries’ central banks to figure out how many currency units to issue.

What maintains the price of any currency? Please look at the next post for the first of two answers.

#demand #prices #currency #demandforecasting

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A Change Of Perspective

Modern economics gets inspiration from thermodynamics, constantly looking for the equilibriums such systems demonstrate.

Multidimensional Economics has a different point of origin.

Consider the maps below and the three questions that follow.

Which two countries are these?

Where do they touch?

Why does it matter?

Look to the next post for the answers.

#demandforecasting #prices

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Why Find Demand Frontiers?

In the last few posts, we’ve been examining Demand Frontiers. You might ask, “What is the point of doing that?”

Well, let’s look.

Recall in the last post, we found the Demand Frontier moved little in 20 years.  In 2016, the Demand Frontier had an equation describing the line running from the upper left to the lower right in the diagram below.  Because the programs forming this line clustered closely about it, the standard deviation of the line is relatively low: $25.5 million.

The United States Air Force proposes to build 100 B-21 bombers at a “projected average procurement unit cost of $550 million per plane in FY2010 (https://lnkd.in/g4Rkx2R or $610M per plane in 2016 dollars.  What are their chances of making that number of planes at that price, given the standard deviation of the Demand Frontier?

As shown below, the B-21 Target is nine standard deviations over the predicted limiting price ($380M) for the B-21.  Examined by another metric, the historical maximum percentage deviation over the Demand Frontier was 17.8%.  The B-21 program proposes to exceed it by 60.5%.

What was the procurement history of other programs that tried to exceed the Demand Frontier? We will find out next time.

#demand #demandforecasting

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Demand Frontiers Change – But Some Not By Much

Markets change.  Demand Frontiers depict the limits of markets to absorb products based on their prices to the quantities purchased.  While some markets change rapidly (cell phones, flatscreen televisions, computers, etc.), others, especially at their limits, are slow to respond.

The market for fighters and bombers is such a market.

At its Demand Frontier, this market has changed little in 20 years.  The constant over that period changed less than 2.5%, and the slope less than 1.0%.  (Note: The F-35A, shown in a previous post, once corrected for its revised 2016 values, fell off of the Frontier).

If a market’s Demand Frontier is stable over decades, what are the chances of vastly exceeding it?  Tune in to the next post for the answer.

#demand #demandforecasting #prices

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Demand Frontiers

The circles in the last post represent the outermost quantity-price points for the bomber market. We call the line of best fit through them the Demand Frontier.

Demand Frontiers form for all mature markets.  They move as the products that form them change their quantities sold or prices.

What does this Demand Frontier reveal about the upcoming B-21 Bomber? (Answer in next post)

#demand #demandforecasting #demandfrontier

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Demand Is Not Hypothetical

Virtually all economics textbooks treat Demand hypothetically.  They strike a line to show how prices would theoretically fall as quantities increase.

In the real world, market Demand manifests itself as a series of points, with quantities (here, of bomber models) on the horizontal axis, and prices (as bomber prices) on the vertical axis, as shown below.  Note the limiting values for this market, shown in open circles.  Collectively, what do these circles represent? (Answer in next post)

#demand #demandplanning #demandforecasting

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Costs And Prices Both Move Down Over Time

In most markets outside of refining and mining, costs and prices move in the same direction – generally downward.

In the case of the Model T, this happened for nearly two decades. When prices exceed costs, we say the product is in Sustainable Disequilibrium.  When costs rise to and exceed prices, producers end the product line (Source, Abernathy, Product Dilemma, 1978, ISBN ISBN-13: 978-0801820816)

#prices #costs #sustainable #sustainable #disequilibrium

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What was once $300, Now Costs $9.55

Product deflations are the opposite of upward-sloping supply curves. They are nowhere more obvious than in the market for flat-screen televisions.

Here are the equivalent buying powers for televisions over time, beginning at $300 in 2000. (Source: https://lnkd.in/gk97rVM) Processes improve, and people learn.

#supply #prices #learningcurve

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What About Learning?

If costs rise as quantities increase in mining and refining, creating what classic economists call upward-sloping curves (see the last post), how do costs behave in other industries?

Let’s look.

Solar manufacturing costs have consistently fallen over time. This phenomenon, known as Swanson’s Law, observes that “at present rates, costs go down 75% about every ten years (https://lnkd.in/gYHnMDz The consistent drop in costs reflects the learning or experience curve, which observes the amount of time people take to complete tasks falls over time. In other words, people get smarter about how to get tasks done; the more often they do those tasks. The learning curve is one of the great omissions in modern economics. Where else can we find such curves?

#prices #supply #learning #learningcurve