[MUD-Dev] Economic model..

Brian Thyer brian at thyer.net
Wed Mar 3 15:51:58 New Zealand Daylight Time 2004


On Tuesday, March 02, 2004 11:10 AM, Francisco Gutierrez wrote:

> In the real world, economic equilibrium comes from the fact that
> the demand for something increases as the price drops, and the
> supply increases as the price rises, so a competitive market finds
> an equilibrium where demand=supply, a monopoly finds an
> equilibrium on the point along the demand curve where
> price*quantity is a maximum, and most markets are somewhere in
> between.

This is exactly what I'm betting on.  The way I see it, most markets
will (as I learned in my Intermediate Price Value Theroy
Class..i.e., hell) fluctuate between the two markets depending on
the demand, supply, market information, effects of game theory, and
other fluctuations.

> For example if I am hungry and dying of hunger, a hamburger might
> be worth 1000 dollars to me, but the second hamburger will not be
> worth that much, and once I am stuffed, I will reach a point where
> the hamburguer is worth zero (unless I can store it for later or
> sell it to somebody else).  This means that as price goes down my
> demand increases.

You're talking about elasticity of demand.  When you're dying of
hunger your elasticity of demand (how elastic your demand is) for
the burger is high.  Meaning you're willing to pay whatever you have
to, money's no object so long as you get that burger.  But as your
demand is met by the available supply your elasticity (marginal
utility function) decreases because you're less and less willing to
pay all that money for a burger because your demand is less.  This
is why companies erect barriers to entry in their markets.  If they
can keep themselves in a monopolistic market, than that elasticity
(marginal utility function) stays high because they control the
supply.

> Also, this decreasing marginal utility function means that I will
> trade off one good for another, until I maximize the utility of my
> investment of labor.  So I will trade my third hamburger for a
> beer, etc.  And I will trade my 9th hour of work for leisure.  But
> if you offer me more for my 9th hour of work I might decide to
> work instead.  This means that as price goes up my supply
> increases.  If everybody has the same incentives as me, then the
> market aggregate demand and the aggregate supply will have the
> same shape, and the market will reach an equilibrium.  This convex
> utility function could be implemented by natural resources that
> are increasingly harder to harvest (require more time, money,
> capital, etc), coupled with biological needs that provide unequal
> return on their satisfaction (the hamburger example).

My strength has always been in theory, and less in the actual math
analysis.  That's why Intermediate Price Value was so hard for me =)
But this is exactly what I'm hoping for in my market.  As demand and
supply fluctuate up and down for each individual consumer/seller,
markets should balance themselves so long as everything else stays
equal.  As natural resources in the world become more scarce, the
elasticity (marginal utility function) of demand goes up because the
supply goes down creating an increased price for a more scarce item.
Same reason I'm paying $1.80 per gallon of gas *gives OPEC the
finger*.
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