Wed Nov 7th, 2007 at 11:14:38 AM EST
I am beginning to have serious problems with that most basic of economic truths, the crossing of supply and demand curves. ChrisCook:
In that little diagram, the "equilibrium" or crossing point is observed, namely a (price, volume) point. The rest of the diagram is counterfactual. I suspect people are using consumption as a proxy for demand and production as a proxy for supply. The difference between consumption and production is the change in inventory. But ignoring that difference for a minute, consumption is just the demand at the "equilibrium" point. Nobody is counting all the times someone goes and says "gee, I want to buy some more of this but it's too expensive" or "gee, I wanted to buy some more of this but the shelves were empty" and so the demand curve is unobserved (unobservable?). Similarly with the supply curve.
Does one have to look at the order book at a commodities exchange (or the open interests in futures) to get supply and demand curves for oil?
And, of course, if the supply and demand curves are counterfactual it is going to be rather hard to measure their slopes (the "price elasticity" of supply and demand).
So, if what people are really looking at is (price, consumption) curves, then all they are doing is looking at consumption trends and extrapolating into the future. Which says little about "demand".
What am I missing?
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