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A 50% price decline doesn't imply there's 50% less demand for petroleum. If 6% less demand is all the margin consumers need to get their supply, then price can
by 0xWTF 1mo ago
A 50% price decline doesn't imply there's 50% less demand for petroleum. If 6% less demand is all the margin consumers need to get their supply, then price can drop quickly. It's all in the margins.
- password4321 1mo agoWhat is the best way to learn more about this, are there any examples? This seems a bit counterintuitive to me.
- Waterluvian 1mo agoNot fully sure this is that, but it reminds me of something an American friend explained about their business under the Trump regime (as a rant about how laypeople were deeply under-reacting to the tourism decline): If it takes 100 tourists to pay his bills, taxes, staffing, and other expenses for the day, the next 5 tourists represent the profit. A tourism decline of 10% doesn’t mean 10% less profit, it means the catastrophic inviability of the whole business as it’s currently structured.
- sarchertech 1mo agoThat assumes he has a fixed profit per person. In reality most business can do things like cut hours for staff, postpone upgrades or long term maintenance, cut amenities, raise prices etc… If most businesses were structured in a way that a small decline in customers immediately puts them out of business, any minor economic downturn would be an unrecoverable positive feedback loop for the economy. I’m not saying a 10% drop won’t put a lot people out of business, but it’s not as much of an existential crisis for the economy as a whole as that story makes it seem.
- lazide 1mo agoUh, why do you think the Fed injects funds the way it does?
- sarchertech 1mo agoSure that’s one of the argument for why they do it but the money doesn’t directly to most small businesses, we do have small downturns, and they don’t result in the majority of small businesses going out of business.
- lazide 1mo agohave you seen the turnover stats on small businesses? most ‘die’ in a few years anyway. look up the history of why the fed exists and you’ll see why we have ‘small’ downturns.
- sarchertech 1mo agoI’m well aware of the history of the fed. Most small businesses fail because they were never serious businesses to begin with. A business closing down after running for a year with no profit isn’t relevant.
- lazide 1mo agoAnd how can you tell which is which?
- sarchertech 28d agoYou can’t always tell the difference, but you can filter out businesses that lasted less than a year, temporary businesses that were setup for real estate transactions, and business that never made a profit.
- II2II 1mo agoI was going to say that curring hours just offloads the problem onto their employees, but the reality is it does that and creates new problems for the bbusiness.If the employee cannot afford to keep the job, they will be forced to search for a new or additional job. The business is either hiring and training inexperienced people, or dealing with staff who have reduced availability. They also cannot do much about fixed costs; postponing maintenance typically increases long term maintenance costs; postponing upgrades, cutting amenities, and raising prices may deter even more customers (keep in mind, nearly everyone is feeling the pinch these days). That is assuming that the business isn't doing that already.
- sarchertech 1mo agoAll of those things are true. There are downsides to any of the levels they can adjust. I’d there weren’t, they’d already be doing it. But it’s wrong to model businesses as if they have no ability to increase profit per customer and predict catastrophe from minor reductions in customer traffic. They can and do figure out how to do more with less.
- Waterluvian 1mo ago> If most businesses were structured in a way that a small decline in customers immediately puts them out of business […] No business chooses to be structured this way.
- sarchertech 1mo agoThat’s not what I was saying. I’m saying that we have small downturns where consumer spending drops yet those drops don’t result in crisis levels of small businesses closing. Which it would if most of them were structured like that.
- xbmcuser 1mo agoits simple demand and supply if you have 100 buyers for 99 the price will shoot up but if you have 100 seller and 99 buyers sellers will drop price so. Previously gas turbines were charging through the nose when sudden demand spikes but now batteries are competing with them and pricing them out
- UltraSane 1mo agoThis sounds like Price elasticity of demand which is a measure of how sensitive the quantity demanded is to its price. https://en.wikipedia.org/wiki/Price_elasticity_of_demand https://en.wikipedia.org/wiki/Price_elasticity_of_demand
- natmaka 1mo agoThere is a (IMHO) good explanation at https://www.next-kraftwerke.com/knowledge/what-does-merit-order-mean https://www.next-kraftwerke.com/knowledge/what-does-merit-or... Keyterms: "marginal cost", "merit order", "market-clearing price".
- msandford 1mo agoThink about gasoline consumption in an economy. If gas is $1/gal in today's dollars you can make many trips, they're almost free. At $3/gal people do some prudent economizing. At $10/gal people stop driving and take the bus, carpool, etc. Making the price go up 10x won't cut consumption by 90% though, maybe only 50%. Trades still need to get to the job, food still has to get delivered to stores and some people who make huge salaries will still drive to work. During the pandemic fuel demand didn't go down by 50% and yet the price dropped dramatically. Sure office workers stayed home but that's not 80% of the jobs. Think about how much the gas price dropped vs how much traffic was still on the streets. It almost certainly wasn't a linear relationship.
- JumpCrisscross 1mo agoMankiw’s Principles of Economics. The concept being illustrated here is elasticity.
- imtringued 1mo agoThink of the knapsack problem but you're trying to fill your knapsack while minimizing costs. You have a given amount of demand, you fill your knapsack using a simple greedy strategy. You pick the lowest bid, then you pick the next lowest bid and so on, until the knapsack is full. Now the question is, why is everyone paid as much as the most expensive bid that was needed to fill the order? Because those bidders could simply predict what the most expensive bid is and then set their bid accordingly, if their prediction is too high, you actually made electricity more expensive by not paying everyone the same clearing price. If their bid is too low they get free money simply by predicting a higher price. So you can just make the system honest and pay everyone the equilibrium price. Of course, the big question that arises is "what if the last producer needed to clear the market is unreasonably expensive?", then there is suddenly a windfall for all the cheap producers called producer surplus. The opposite is also true when you get rid of these expensive producers, the price collapses down to the second highest bid. This is consumer surplus.