Mankiw is wrong

Law of Supply and Demand Fallacy Icon

April 7, 2019
Update: April 2021
The actual supply prices of Covid vaccines are consistent with our assertions here that the supply curve cannot be naturally vertical, and is the final proof of the sophistry of the equilibrium theory of Economics

Adam Smith’s Supply and Demand Curves (below) are the foundation our proposed science called pantrynomics which is based on Classical Economics. It can be applied to any problem in economics in order to provide common sense answers.

Supply and Demand Correct

For example, the question below appears in Principles of Microeconomics by Mankiw, which teaches the unsustainable paradigm of Neoclassical Economics:

Question

The equilibrium price of coffee mugs rose sharply last month, but the equilibrium quantity was the same as ever. Which explanations could be right? Explain your logic.

Re-phrased Question

The market price of coffee mugs rose sharply last month, but the quantity supplied was the same as ever. What is the explanation?

This re-phrased question does not impose ’equilibrium,’ since it is a mercantile sophistry or a not-so-obvious-lie. We then apply Socrates’ Dialectical method in order to chase down the cause of its hypothesis. Unlike the scientific method which just gets data from perceptions, the Dialectical method gets data or inferences from the perceiver himself, which in this case is the mind of the asker.

_ Economist Pantrynomist
Chart The supply for coffee mugs was “perfectly inelastic” The price of the coffee mugs during the previous month was an introductory price. The price afterwards is the natural price (a concept that is not present in economics)
Short Answer Economics Supply Pantrynomics Supply
Long Answer There is a single supplier of coffee mugs in the whole society. People have no choice but to buy from it at whatever price it wants, so the demand curve shifted to the right. Demand increased but supply was totally inelastic. There are many suppliers of coffee mugs. A certain kind of mug, made from a limited material, proved to be a hit among consumers, so the supply curve for it shifted upwards.* Based on the only information in the question, and assuming it is a realistic scenario (why would students be taught unrealistic scenarios?), we can deduce that the previous price for the special coffee mug was an introductory price (lower than usual) in order to entice buyers (four mugs were sold at $3 each). The price was raised the next month as demand rose and the mug-makers had to compete for the limited material. Thus, four new mugs could be sold at $6 each, with a $3 rise in cost. Production was not increased because the raw material was limited.

*We don’t say that it shifted to the right just as we don’t say that today’s price or production quantity is ‘more rightwards’ than last year’s. We always say that it’s higher or lower and never ‘righter’ nor ’lefter’.

_ Economist Pantrynomist
Conclusion Fallacy: There is only one coffee mug supplier or Coffee mugs are so essential to society that people won’t mind paying increasingly high prices for it Relative Truth: No coffee mug, nor any product, could ever be worth an infinite value as to be a “perfectly inelastic” good.

An established lie, taught in schools, creating a fake economic world that crashes often

The marginalist elastic and inelastic supply curves are an example of sophistry. This is because supply curves ultimately have a downward slope, responding to the downward demand curve. We have called this Adam Smith’s Demand Motive, which is the opposite of Say’s Law.

In other words, businesses produce to meet the demands of society. In economics however, the demands of society are manipulated to increase the produce and sales of businesses (since profits, and consequently utility and pleasure, come with sales), and so infinitely high prices are possible.

Thus, in the problem, people somehow are willing or made willing to buy the same coffee mug at a much higher price. In reality, this can only happen if:

Scenario 1: There was only one coffee mug supplier in the whole society.

Following the logic of the perfectly inelastic curve, that supplier merely needs to advertise its mugs to increase demand or ‘shift the demand curve to the right’. It can then steadily raise its prices as demand increases fearing no loss in demand. (The economist’s answer leads to this)

Scenario 2: There was an increased demand for that kind of coffee mug

An example is a special event for that month. Smith gives an example as a public mourning that raises the demand for black cloth. The same thing happens for flowers during Valentine’s day. But in such cases, production is increased. Since the question says production was not increased, it means the event was sudden or temporary, like rain creating a sudden demand for umbrellas on the street. Even if this were the case, competition would prevent prices from being rising arbitrarily unless there was only one umbrella supplier, which leads to the first scenario.

More realistically, the event called specifically for that kind of mug, which leads to the next scenario:

Scenario 3: That kind of coffee mug suddenly became so popular, for example through social media.

It was a new kind of mug based on a limited material. It was first sold at an introductory price to test the market. Once demand was established, the competition* among mug-makers for the limited material raised the cost, without increasing the number of such mugs in society. This increased cost then increased its natural price. Unlike the economist’s answer, the price of the mugs in this case cannot be raised to infinite heights. The pantrynomist’s answer leads to this.

*In Economics, the knowhow to make the special mugs would be monopolized by a single supplier. In pantrynomics, on the other hand, the basic intellectual property is made available to allow others to make the product and quench all demand as fast as possible.

Update: July 2021
This is consistent with Biden’s call for the intellectual property for vaccine-making to be made open.
Promo pricing
Introductory pricing occurs in real life
Update: April 2021
The supply and demand for vaccines](/fallacies/economics/inelastic-supply-curve) is recent proof that a supply curve can be inelastic if the society is taught to be selfish. But such selfishness is consistent with war, as seen in World War I, II, Cold War, War on terrorism, and the recent trade war between the US and China. Why would a science teach people to wage war as a natural state?

Conclusion

In a free society, a product can never be “perfectly inelastic*”. Even if oil prices, for example, were raised to exorbitant prices, society will switch to coal, LPG, firewood, electric cars, public transport, bicycles, etc. through their own effort.

Even if a terminal cancer patient was sold a life-saving drug in exchange for all his life’s present and future money and assets, as to leave him only his clothes for the rest of his life (the highest possible price for his life is his life, as in pure slavery), he will likely not do the trade. Thus, it can be observed that in economics, economic slavery** is a real possibility, as seen in rising prices and in both personal and governmental debt (US fiscal cliff, Latin American debt crisis, Greek debt crisis, etc.).

*Samuelson (and Mankiw) correctly assigns elasticity to Supply, while Case and Fair assigns it to Demand. Both assign ceteris paribus or a non-changing universe which is a very obvious fallacy ** We define slavery as a regular state of control of another’s actions that produces pain. We replace the jargon ’elastic’ and ‘inelastic’ with easy-to-understand words: ‘price-sensitive’ and ‘price-insensitive’.

Update: 10/2015

Looking back, we can see that Smith did mention in The Wealth of Nations that a commodity can be ‘perfectly inelastic’ if it matches the following conditions:

The first kind is the rude produce which human industry cannot multiply at all. Examples are: most rare birds and fishes, different sorts of game, and almost all wild-fowl and all birds of passage, etc. Nature produces them only in certain quantities. They are very perishable. It is impossible to accumulate together such produce of different seasons. Their demand increases with the increase in wealth and luxury. Their supply cannot increase beyond this increase of the demand. The quantity of such commodities remain the same while the competition to purchase them is continually increasing. Their price may rise to any unlimited height. Book 1, Chap 11, Digression

However, it is obvious that such goods are not only attended with immorality, but are simply illegal just as slavery is illegal. Thus, it is still consistent with the earlier conclusion.

Teaching the inelastic supply curve therefore not only teaches selfishness and war as a natural state but also the extinction of certain species.

rhino-horn
Rhino horns are now worth more than gold or cocaine and is the cause of their extinction
Update: October 2016

Merging the old question with Smith’s quote can help us create a new, more realistic question below.

Updated question: The market price of Rhino horns rose in Vietnam sharply last month, but the quantity supplied was the same as ever. What is the explanation?

Pantrynomist Answer:

  • There was a sudden demand for rhino horns because of a rumor that it could cure cancer. Since rhinos are endangered, the production of their horns could not be increased. The increased demand increased the penalties imposed by the law, leading to higher prices for the smugglers who must offset the higher risk or increased bribe payments, adding to the cost. Unlike the economist’s vertical supply line, the supply line will still be downward sloping, to match Smith’s maxim:

The natural price is the central price, to which the prices of all commodities are continually gravitating. Different accidentsmay sometimes keep them suspendeda good deal above it.. But.. they are constantly tending towards it

Inelastic Supply Curve False
The yellow and green lines represent the demand and supply curves before the rumor (representing natural demand and supply and the natural price), while the blue and red lines represent those lines after the rumor
dead rhino