From: ChuckKuecker (ckuecker@mcs.net)
Date: Tue May 05 1998 - 19:05:28 MDT
At 19:38 5/4/98 -0400, you wrote:
>>
>>The 'sunk cost' needs to be covered BEFORE I can realize profits on my
>>invention. Otherwise, there is no point in the whole process - if I can
>>never recocver my R+D costs, why should I even think of creating something?
>
>I don't understand what you mean when you say that your costs must be
>recovered before you make a profit. You cover costs BY making a profit.
>That's the whole point. :)
>
For me, profit = income - costs. Before I can get an income, I have to be
able to present a product for sale. The costs of doing that must be covered
by my income from sales before I see any profit. If I can't sell enough
product to cover costs, I am bankrupt.
>Careful; in microeconomics we refer to two different entities which are
>easily confused. When we refer to "demand increasing" or "total demand
>increasing," we mean that the whole demand curve has shifted upwards (as
>takes place when you bring a new product to market). However, the
>"quantity demanded" is a different beast altogether; the quantity demanded
>will increase, for example, when supply increases (ie the supply curve
>shifts down).
>
Okay. I admit it. I got lousy marks in econ. I am ignorant of some of the
definitions, but I know when I am making money..
>As far as "magical" increases in demand, I don't think it's at all
>unreasonable to think that you'd get increased demand if you were offering
>a new product, even if others were also offering the same product,
>presuming that there is a profitable market for what you're selling.
>(DRAM, for example, may not be a profitable market at all.) People see a
>new thing, so some people who want the new thing and couldn't buy it before
>will now start doing so. What's so magical about that?
>
I believe the DRAM problem arose because someone forecast a much too rosy
increase in demand, which never occurred.
>
>The graphs that I showed you above were not the supply curve and demand
>curve for the entire market, but only for your firm. If you were to add up
>the demand of all the buyers buying from you and your competitors, as well
>as the supply costs for you and all of your competitors, you'd get a
>microeconomic supply and demand graph for the market. (They look
>remarkably similar, perhaps I didn't make that clear.) In that case,
>you're right, the increase in demand would have to be divided evenly among
>the firms.
>
I understand your point there, now.
>
>Thus, in the end, if the revenues inside the trapezoid are greater than the
>costs of invention, then you'll invent. If not, it's not worth it, so you
>won't.
>
Therein lies the rub - who can tell if the costs will be less than the
revenuse. It's always a gamble. Sometimes you lose. C'est la vie..
>Now, as for the monopoly analysis...
>
>Now, this isn't saying that VW starts with their price at some
>extraordinarily high value at the beginning of every year and then
>decreases the price with each car sold. Obviously, if they were selling
>cars where Q was the millions of cars sold and P was the price in thousands
>of dollars, they will set one price ($7) and sell a certain quantity of
>cars (3 millions). However, if they want to sell 4 millions, VW must lower
>the price. [This is actually a bad example, because if you don't want a VW
>you can always buy another car, whereas a monopolist would have cornered
>the entire market for all cars.]
The market will accept so many at a certain price, and if you want to sell
more, you lower the price. Agreed.
>
>When there's lots of competitors, however, you can't set your price that
>way. The market sets your prices in perfect competition, because if you
>raise your prices at that quantity then nobody would buy from you;
>meanwhile if you lower your price at that quantity you'll take a loss.
>Thus, your price is the same price as the entire market, and thus your
>marginal revenue is given by the simple demand curve.
>
I begin to see where some of our disagreement may lie. I am talking about
the real world, not theory.
>I'm not making this up... You should be able to find this in any
>microeconomics textbook.
>
See above..
>
>>There
>>are going to be second order effects - lags in development, tooling, etc.
>>that will prevent the market from being fully satisfied at least in the
>>beginning of sales of a new invention. Some 'profit' will always be
>>unreaped. This 'loss' is an imaginary quantity, since there is no way to
>>EVER recover it, unless you posit 'thought to production' technology..
>
>What do you mean by "satisfied?" If for some reason you can't make enough
>to "satisfy" demand, then you'll just sell fewer; the loss in sales is
>deadweight loss for you and for your customers.
>
Fully satified, in my mind, is there is no one left who wants the product at
the moment, all have been served. Until this happens, there is still demand.
>Once we observe that a monopolist makes more profit producing at a lower
>quantity and a higher price than at a competitive price and at lower
>quantity, we are able to restate it in another way: a monopoly would have
>to start taking a loss on every extra unit sold in order to reach the
>competitive quantity, because in order to sell that much, the monopolist
>has to lower its price to a competitive price (otherwise people won't buy
>the competitive quantity!), further cutting into its profits.
>
>To be blunt, you'd have to be MAD to produce like that. It simply makes no
>sense, once you've got monopoly status, to cut into your profits that way.
>
In the absence of any controls, how do you prevent a monopoly, given
somebody with the will to do it and no scruples?? A free market should be
free of government handouts and special favors, but should also be free of
coercion and use of force..
>>If the competitive price is arrived at by allowing anyone who happens along
>>to steal my idea, I might as well stay out of the market.
>
>Yes, that was what I was trying to say. If you can't keep afloat at a
>competitive price, then that's the market's way of saying "we don't want it
>that badly."
>
Agreed. That I need to be 'competitive. I still don't agree that I should
have to allow others to take my devlopment as is without compensating me.
Look at it this way. I make ten widgets and put them on the market. I get
people offering to buy them. Someone comes along and steals five, exerting
some effort to convey them to his plant. I should allow him to keep and sell
them, because he took the effort to transport the product? The same thing
holds if I produce an idea, convert it to workable plans, and someone takes
the plans and builds my gadget. I have been the victim of a theft either
way. Ideas are the property of the thinker, until that person gives the
rights away.
>>It's pretty hard to reap profits BEFORE you sell a product, unless there's
>>some fairy godmother of a government agency that pays me for the
>>development, then lets anyone who cares to make the gadget! We have enough
>>handouts now!
>
>Again, I think that inventors should sell their ideas, once, and then
>conclude the transaction. Firms who try to negotiate a per-copy
>arrangement will have greater marginal costs than firms who don't have this
>arrangement, and thus won't be able to compete in a competitive market,
>whereas a firm which pays a sunk cost can recover that cost from the
>increase in demand.
>
All we need is someone who will put up the money to the inventor for the
rights to the product, knowing that as soon as he produces the thing, twenty
knockoff plants will be making the identical thing, and at less cost, since
this poor fellow had to pay the inventor. The theft is now one person
removed from the inventor, and he does not suffer directly. Since there is
no property rights in an idea, the first plant owner can't recover from the
copyists..
Chuck Kuecker
Chuck Kuecker, President
C K Enterprises, Inc.
326 Deveron Circle
Cary, Il 60013
USA
(847) 639-2771
(847) 516-1410 FAX
ckuecker@mcs.net
www.mcs.net/~ckuecker/
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