Infinity Is Your Friend In Economics

from the use-it-wisely dept

Continuing our ongoing series looking at economics when scarcity is removed from markets, I wanted to go back to the early discussion on the importance of understanding zero in making sense of markets where scarcity is removed. That post discussed how many who believe economics requires scarcity do so because they believe economic equations break down when a zero is put into them. That is, they see a zero in the "marginal cost = price" statement and they say that the system must be broken, because you can't have a market when the price is zero. However, that's wrong. Zero works just fine, but you have to understand why.

The key actually isn't in zero, but zero's flip side: infinity. Just like many early societies had tremendous difficulty in coming to understand the concept of zero, the concept of infinity was incredibly difficult to grasp. Just as with zero, certain aspects of mathematics and physics stalled out without an understanding of infinity -- and it would be a shame if the same happens for economics. However, just as with zero, many who look at the economics get scared off by infinity and assume it must break otherwise proven concepts. Throw an infinity into the supply of a good and the supply/demand curve is going to toss out a price of zero (sounds familiar, right?). Again, the first assumption is to assume the system is broken and to look for ways to artificially limit supply.

However, the mistake here is to look at the market in a manner that is way too simplified. Markets aren't just dynamic things that constantly change, but they also impact other markets. Any good that is a component of another good may be a finished good for the seller, but for the buyer it's a resource that has a cost. The more costly that resource is, the more expensive it is to make that other good. The impact flows throughout the economy. If the inputs get cheaper, that makes the finished goods cheaper, which open up more opportunities for greater economic development. That means that even if you have an infinite good in one market, not all the markets it touches on are also infinite. However, the infinite good suddenly becomes a really useful and cheap resource in all those other markets.

So the trick to embracing infinite goods isn't in limiting the infinite nature of them, but in rethinking how you view them. Instead of looking at them as goods to sell, look at them as inputs into something else. In other words, rather than thinking of them as a product the market is pressuring you to price at $0, recognize they're an infinite resource that is available for you to use freely in other products and markets. When looked at that way, the infinite nature of the goods is no longer a problem, but a tremendous resource to be exploited. It almost becomes difficult to believe that people would actively try to limit an infinitely exploitable resource, but they do so because they don't understand infinity and don't look at the good as a resource.

If you're looking to catch up on the posts in the series, I've listed them out below:

Economics Of Abundance Getting Some Well Deserved Attention
The Importance Of Zero In Destroying The Scarcity Myth Of Economics
The Economics Of Abundance Is Not A Moral Issue
A Lack Of Scarcity Has (Almost) Nothing To Do With Piracy
A Lack Of Scarcity Feeds The Long Tail By Increasing The Pie
Why The Lack Of Scarcity In Economics Is Getting More Important Now
History Repeats Itself: How The RIAA Is Like 17th Century French Button-Makers
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  1. icon
    Mike (profile), 19 Jan 2007 @ 2:56am

    Re: I don't agree...

    I might be misunderstanding your point... but I don't agree that marginal-cost=0 means that the current economic models break down.

    I didn't say it breaks down. i said the opposite. It works great. It's those who are asking for gov't protections and artificial scarcity who believe it breaks down.

    What they don't tell you (or, they didn't tell *me* anyway) is that this isn't the price that a supplier is really going to charge. The equilibrium price is merely the price at which there will be no surplus and no shortage. But that's not the price you see in the store.

    I believe you're misunderstanding the MC = P equation. The point of MC = P is to say that in a competitive market, price will be *forced* to equal MC. Think of it this way, if the market is truly competitive, each side will keep lowering their price until it equals marginal cost.

    It's not instructive, it's predictive.

    And, no, no one wants to price their goods at marginal cost, but a competitive marketplace means they will. The trick is figuring out how to keep ahead of the competition though.

    Yet, somewhere in the middle, the area will be at a maximum... and that's where you want to set your price.

    Uh. No. That's where you WANT to set your price. But the whole idea of a competitive market is that you cannot set your price there.

    The point I'm making is that the market is becoming competitive, and the companies that don't realize it are going to be in trouble.

    So, your assertion that marginal-cost=0 upsets the current system doesn't ring true with me, since pricing is about maximizing revenue, not eliminating surplus/shortage.

    Again, you're talking about pricing from a desirable standpoint, not a competitive market standpoint.

    As an additional example, look at movie studios. Movies are the quintessential example of something where the fixed cost vastly outweighs the marginal costs... even before the digital age.

    Sunk costs. Fixed costs are sunk and have no play in pricing decisions in a competitive market.

    As an example, suppose that Eminem is thinking of going into the studio and recording a new album.... or... he might, instead, design a new mousetrap. Under the "zero-marginal-cost means scarcity doesn't exist" notion, the album should be free, Eminem won't make any money, and so he'll just decide to go work on mousetraps and then, suddenly, there's *total* scarcity.

    No. That's the point I keep making. There are tons of OTHER ways to make money. There isn't total scarcity at all. Even if the music is free, there are plenty of things to sell.

    Now... you don't like the record companies and movie studios. I get that.

    No, that's not it at all. I love the record companies and the movie studios. I want them to make more music and movies, because I love music and movies.

    I just think their current strategies LIMIT their market, and SHRINK their potential to do so.

    This is about helping them learn to capture a much bigger market.

    The RIAA is worried about the RIAA maintaining it's prominence in an age when it's looking more and more like a dinosaur.

    Indeed, but there are opportunities for it to change with the times.

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