Does variety dissipate inflationary tendencies?

[brainstorm]

Consider a simple scenario in which only a few products were available for purchase, e.g. bread, water, sugar, soybeans, and salt. If the entire money supply was spent either investing in these industries or consuming the products, price fluctuations in each would influence the markets for the others as follows, I think:

Say bread decreased from $2 to $1 per loaf due to a bumper crop of wheat. This would cause grocery savings, which would liberate grocery money to be spent on the other products. Investors would divest in bread and invest in the other commodities, since their price would increase/inflate and this would stimulate more investment to cash in on the extra profit. In short, savings in some products could result in inflation in other products.

Now, if this effect in fact occurs, would it be the case that an economy with larger varieties of products and services would dissipate surplus spending more broadly thus preventing inflation or at least constraining it more than if their were relatively few goods and services?

 

[WhoWee]

Say bread decreased from $2 to $1 per loaf due to a bumper crop of wheat. This would cause grocery savings, which would liberate grocery money to be spent on the other products. Investors would divest in bread and invest in the other commodities, since their price would increase/inflate and this would stimulate more investment to cash in on the extra profit. In short, savings in some products could result in inflation in other products.QUOTE]

Why was there a bumper crop of wheat - perhaps less soybeans were produced?

 

[brainstorm]

Say bread decreased from $2 to $1 per loaf due to a bumper crop of wheat. This would cause grocery savings, which would liberate grocery money to be spent on the other products. Investors would divest in bread and invest in the other commodities, since their price would increase/inflate and this would stimulate more investment to cash in on the extra profit. In short, savings in some products could result in inflation in other products.QUOTE]

Why was there a bumper crop of wheat - perhaps less soybeans were produced?

It doesn't matter. The point was to consider how fluctuations in the price of one good/service influences prices and investments in others. If there were only two goods, e.g. wheat and soybeans, then if the price of wheat would go down, the price of soybeans would have to go up if investors wanted to maintain the same level of income, right (unless quantity of wheat demanded went up for some reason). So if there are more goods and services, could it be that inflation gets spread out more because there are more different means of investing and increasing revenue from other goods and services? Are you following my logic here?

 

[WhoWee]

It doesn't matter. The point was to consider how fluctuations in the price of one good/service influences prices and investments in others. If there were only two goods, e.g. wheat and soybeans, then if the price of wheat would go down, the price of soybeans would have to go up if investors wanted to maintain the same level of income, right (unless quantity of wheat demanded went up for some reason). So if there are more goods and services, could it be that inflation gets spread out more because there are more different means of investing and increasing revenue from other goods and services? Are you following my logic here?

Yes, but often times these models consider a set amount of production (farm land) capacity - an increase in wheat could indicate a decrease in production of soy.

 

[brainstorm]

Yes, but often times these models consider a set amount of production (farm land) capacity - an increase in wheat could indicate a decrease in production of soy.

I see what you're saying: if there is a fixed amount of farm-land and more land gets used for wheat, then less land is available for other crops, such as soy. That's not even the assumption I had when I used a bumper crop of wheat as an example. I assumed that the same amount of land was being used for wheat but that it grew robustly. Either way, it is completely irrelevant to the point of the thread.

The issue I'm trying to get feedback on is how surplus revenue/income gets redistributed when savings occur in other areas. For example, if you sold a house in 2007 for $300/K and bought it back in 2010 for $150K, your monthly mortgage payment could have decreased by like $1000/month.

Now the question is whether this surplus $1000/month in people's budgets on a large scale would create less inflation if those people's budgets have a larger instead of smaller variety of expenditures. More generally, my point is that when consumers gain more disposable income, businesses are able to adjust prices on a variety of goods until the surplus budgets are maxed out. Therefore, if the revenue increases are spread out over a wider variety of goods and services, inflation would be lower on average than if the same revenues were collected from a relatively small variety of expenditures.

Basically it's the same logic as taxes. The government makes a budget, decides how much revenue it needs to cover its costs (assuming it didn't run a deficit), then it sets tax rates on various products and services to achieve its revenue goals. You can look at business the same way, except business can spread its revenues out over all its products, whereas government tends to focus taxation on specific products and services more than others.

 

[WhoWee]

I see what you're saying: if there is a fixed amount of farm-land and more land gets used for wheat, then less land is available for other crops, such as soy. That's not even the assumption I had when I used a bumper crop of wheat as an example. I assumed that the same amount of land was being used for wheat but that it grew robustly. Either way, it is completely irrelevant to the point of the thread.

The issue I'm trying to get feedback on is how surplus revenue/income gets redistributed when savings occur in other areas. For example, if you sold a house in 2007 for $300/K and bought it back in 2010 for $150K, your monthly mortgage payment could have decreased by like $1000/month.

Now the question is whether this surplus $1000/month in people's budgets on a large scale would create less inflation if those people's budgets have a larger instead of smaller variety of expenditures. More generally, my point is that when consumers gain more disposable income, businesses are able to adjust prices on a variety of goods until the surplus budgets are maxed out. Therefore, if the revenue increases are spread out over a wider variety of goods and services, inflation would be lower on average than if the same revenues were collected from a relatively small variety of expenditures.

Basically it's the same logic as taxes. The government makes a budget, decides how much revenue it needs to cover its costs (assuming it didn't run a deficit), then it sets tax rates on various products and services to achieve its revenue goals. You can look at business the same way, except business can spread its revenues out over all its products, whereas government tends to focus taxation on specific products and services more than others.

The OP specified a very well defined closed loop. The housing example would be subject to many variables including real estate taxes, mortgage rates, downpayment, income taxes, insurance, and other expenses.

 

[brainstorm]

The OP specified a very well defined closed loop. The housing example would be subject to many variables including real estate taxes, mortgage rates, downpayment, income taxes, insurance, and other expenses.

The example in the OP was a simplified example to illustrate the concept for ease of discussion. Obviously real economics is more complex, but the question is whether it is possible to identify such a general effect of variety on inflationary tendencies. Of course, first you have to somewhat agree with the logic that inflation is caused by surplus disposable income among consumers. This would not be the case in the strictest rationality-assuming supply and demand models. Those assume that people will always shop for the lowest price and firms will always compete against each other in terms of cost-reduction to compete to be the price-leader with the highest quality product. In reality, I think firms compete for market niches with the least elastic demand, which promotes the highest possible price/profit.

Despite the complex of costs associated with home-ownership, don't you think that decreasing mortgage payments increases disposable income generally?

 

[WhoWee]

Despite the complex of costs associated with home-ownership, don't you think that decreasing mortgage payments increases disposable income generally?

Assuming there is adequate cash flow to make the payment initially - a lower payment will free cash for other uses - yes.

 

[brainstorm]

Assuming there is adequate cash flow to make the payment initially - a lower payment will free cash for other uses - yes.

And if widespread disposable income is increasing and being spent (i.e. not saved), the items purchased will tend to inflate because of increased demand, correct?

 

[WhoWee]

And if widespread disposable income is increasing and being spent (i.e. not saved), the items purchased will tend to inflate because of increased demand, correct?

That will depend upon where the goods are in their product cycle - if manufacturing related economies of scale been achieved and maximized - yes. If the manufqacturing and distribution costs drop due to mass production - no.

 

[brainstorm]

That will depend upon where the goods are in their product cycle - if manufacturing related economies of scale been achieved and maximized - yes. If the manufqacturing and distribution costs drop due to mass production - no.

You're basically assuming cost-determined price-competition in an open market, where an expanding market for mass-produced goods spreads the costs among a wider consumer-base.

I think that marketing-practices tend to intermediate in a way that creates niche-products whose main goal is to maintain the highest price possible within their niche. E.g. if shampoo-production could be increased in a factory, it would be done by creating a new niche or status of shampoo, which in turn would be marketed somewhere within the range of existing shampoo brands. If it would succeed relative to the higher-priced brands, its price would be slowly raised to see if consumers would continue to buy it at the higher price. If it was unsuccessful, its price would be lowered to see if it could draw consumers away from lower-priced brands. Either way, the ultimate goal is to get consumers to devote as much of their disposable income as possible to shampoo, which translates into an inflationary tendency.

 

[WhoWee]

You're basically assuming cost-determined price-competition in an open market, where an expanding market for mass-produced goods spreads the costs among a wider consumer-base.

I think that marketing-practices tend to intermediate in a way that creates niche-products whose main goal is to maintain the highest price possible within their niche. E.g. if shampoo-production could be increased in a factory, it would be done by creating a new niche or status of shampoo, which in turn would be marketed somewhere within the range of existing shampoo brands. If it would succeed relative to the higher-priced brands, its price would be slowly raised to see if consumers would continue to buy it at the higher price. If it was unsuccessful, its price would be lowered to see if it could draw consumers away from lower-priced brands. Either way, the ultimate goal is to get consumers to devote as much of their disposable income as possible to shampoo, which translates into an inflationary tendency.

What are you saying in terms of cost savings due to mass production (plus the allocation of R&D) over more units?

 

[brainstorm]

What are you saying in terms of cost savings due to mass production (plus the allocation of R&D) over more units?

I'm saying that the cost-savings of mass-production do not automatically get translated into consumer-savings. Instead, consumers are marketed products in a way that prevents or minimizes retail competition and that the cost-savings are thus distributed among employees and shareholders (and, of course, government and its beneficiaries through taxation).

In a classically competitive market, consumer rationality combined with supply-side competition would reward those firms (and governments) that reduce costs and pass the savings onto consumers. The net result would be lower retail prices and more tightly-budgeted workers, producers, and regulators. It is a trickle-down/around effect of rationality and competition.

 

[WhoWee]

I'm saying that the cost-savings of mass-production do not automatically get translated into consumer-savings. Instead, consumers are marketed products in a way that prevents or minimizes retail competition and that the cost-savings are thus distributed among employees and shareholders (and, of course, government and its beneficiaries through taxation).

In a classically competitive market, consumer rationality combined with supply-side competition would reward those firms (and governments) that reduce costs and pass the savings onto consumers. The net result would be lower retail prices and more tightly-budgeted workers, producers, and regulators. It is a trickle-down/around effect of rationality and competition.

When you say "consumers are marketed products in a way that prevents or minimizes retail competition" you're referring to the retail delivery model? In the retail model wholesalers (or very large retailers) purchase directly from manufacturers, transportation adds to the cost, the retail outlets market the goods to the public (which raises the base cost), the retailers operate from "big boxes" that is very expensive commercial locations convenient to the public (which adds to the cost), the "big box" stores employ salespeople at or near minimim wage (plus an incentive?) which adds cost, then consumers often purchase the goods on credit (which adds cost).

Is this what you meant?

 

[brainstorm]

When you say "consumers are marketed products in a way that prevents or minimizes retail competition" you're referring to the retail delivery model? In the retail model wholesalers (or very large retailers) purchase directly from manufacturers, transportation adds to the cost, the retail outlets market the goods to the public (which raises the base cost), the retailers operate from "big boxes" that is very expensive commercial locations convenient to the public (which adds to the cost), the "big box" stores employ salespeople at or near minimim wage (plus an incentive?) which adds cost, then consumers often purchase the goods on credit (which adds cost).

Is this what you meant?

Not exactly, but it is related. I basically explained in my example about shampoo how market niches are created and priced in ways that strata of brands and sub-brands can be varied relative to each other instead of all competing to the lowest price. If there are 20 different brands of shampoo, and each brands have several price-variants within them, new brands or "flavors" tend to seek a market position between established brands instead of making a daring low-price entry into the market to take over as much market-share as possible and challenge established brands to lower their prices in order to compete. This type of head-to-head price-competition is most avoided/averted in contemporary capitalism because everyone (except the consumer) stands to make less money than if they would all basically avoid competing (in terms of price) by seeking niches and pricing the niche as high as possible to avoid starting a price-war. I believe this is basically what game theory says about oligopoly.

Your retail-delivery model contributes to niche-marketing by constraining consumer expectations about how to shop. If alternative models were adopted, such as wholesalers distributing products through numerous product-specialists operating out of their homes or open-air markets, for example, these could challenge the relative market dominance of established retail outlets. If you, as a consumer, had the option of shopping in a climate-controlled retail store that is organized, cleaned, managed etc. for a premium price or shopping online and going to pick up your merchandise in a local residential neighborhood for a significant discount, which would you choose?

Now, if you had the choice of investing in stock or working for a retailer with a relatively controlled supply-chain, which would maintain higher prices and offer you higher wages and/or stock-earnings, or selling mp3 players out of your house and competing with other residential distributors in terms of price and service, which would you choose? Now what if the choice was made slightly more complex by the fact that retail work would demand more of your time and flexibility but the home-distributing caused your business and therefore revenues to fluctuate unpredictably?

This is getting very far from the topic of the OP, though, which was whether having a wider variety of goods/services causes inflation to disperse/dissipate when spending is rising because the spending is distributed over a wider range of purchases?