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| INTRO TO LIBERTARIAN ECONOMICS |
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BASICLIBERTARIAN/CONSERVATIVE ECONOMIC THEORY |
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The two bases of micro-economics are supply and demand. In other words, unless the individuals of a society desire something, there will be no demand, and, similarly, unless something can be produced at a cost - including profit! - which the consumers are willing to pay, there will be no supply. The first step, then, is that there be a sufficient demand for a good, for which there is a potential supply from which a sufficient profit can eventually be gained, to induce the would-be producer(s) to take on the immediate costs in terms of time, money and alternate opportunities - and that the supply be available at a cost low enough for the would-be consumer(s) to buy the product. Once this has been established, the would-be producers need to get a sufficient amount of money for setting up the business prior to initial sales. This requires that the producer(s) already have sufficient funds or that they are able to get access to enough money to start up the business and make it profitable in a period of time short enough to pay back the loans. Thus, banks, investors, or other money-lenders are necessary to get the business operating. Further, these lenders must get a sufficient profit from the loan of their money to be willing to abstain from using it for other purposes, such as personal benefits, luxuries or other potential money-making ventures; however, if the interest or return demanded is so great that it would cause the price of the good(s) to excel the costs the consumers are willing to pay, the would-be producer would be unwilling to engage in the activity, since the eventual effect would be a decline in demand, requiring an even higher price for each individual good in order for the interest or return to be paid back - and for the producer to make the hoped-for profit!, with the resultant increased cost further lowering demand and resulting in a spiraling effect of increasing prices and decreasing demand. Thus consumer demand at a certain price limits the ability of investors and lenders to charge extravagant interests while a sufficient return insures that numerous persons will engage in lending and investment, causing competition to occur. Such competition forces others to keep the rate of return lower since the whole process forces the producers to choose those investors or money-lenders who are going to charge a lower interest. This creates a balance and changes in this balance play a major role in determining the rate of interest to be charged. |
The final step in this basic model is that competition arises to meet the demand because a sufficient demand exists for numerous producers to become involved in the process. This increased demand lowers the cost of the good as each competitor attempts to undersell the others in an attempt to gain market share. This is made possible by the fact that one can spread the inflexible costs of production over the whole amount of goods produced. As an example, if the building rent is $1000, then one can sell 100 units at a lower price-per-unit than 20 units because the $1000 is spread over the price of 100 units instead of 20 and the portion of the $1000 in building rent is $10 per unit rather than $50 [overall flexible costs, such as electricity will often increase somewhat with an increase in the number of products produced, but the price of each good will not increase since the electricity used is the same for each good and the cost is included in that good. Further, other changes, such as the need for larger facilities or increased prices due to harder to attain raw materials may set an upper limit after which the production of more goods would result in an increase in per-unit costs - the law of diminishing returns]. Profit works in the same way - for instance, if a potential producer is willing to engage in the time, opportunity cost and effort to produce the good for a profit of $1000 a month, then if he is able to sell 100 goods, he can charge $10 per unit as profit, as opposed to $50 per unit as would be the case if he was only able to sell 20 units. Here too, then, a balance develops. Further, an increasing number of customers would go to his competitors if he chose to charge a higher profit. He would eventually find himself having to charge increasingly larger sums to maintain his profit while the increasing costs would continue to drive greater numbers of consumers to his competitors. The avaricious producer would soon find himself going bankrupt! Despite certain exceptions, such as demand increasing faster than production and an increase in requirements for production resulting in inflation, and monopolies [either natural or through the use of market share and resources to undercut competition], this model generally requires that producers charge the minimum level necessary to produce the goods while remaining in business |