13 August 2010

Topsy-Turvy: Turning that Well-Worn Graph on its Head

Here is one for the theorists amongst you - a longer and deliciously academic paper available on request. But for now just enjoy the sense of complete upset that could be caused to a neoclassical economist by the thought that, not only is there supply and demand model (see the figure) ridiculously simplistic, but both lines might actually be oriented in the opposite direction from those conventionally illustrated.

Such is the hypothesis of the German-New Zealand economist Stefan Arne Kesting, who argues that, not only might the directions of the two curves be reversed, but it might actually be possible to posit that an equilibrium is reached.

Conventionally (see the diagram) the supply curve is illustrated as upward sloping, since as the price of a good increases the producer is willing to supply more. However, Kesting points out that, 'Based on arguments of economies of scale and increasing returns by Alfred Marshall. . . marginal and average costs of production and prices are shown to decrease in some instances when output is extended.' This might suggest a supply curve that slopes downwards for a certain range of prices.

In the case of the demand curve, Kesting argues that Veblen's ideas about conspicuous consumption might cause this to be upward sloping. The conventionally downward sloping curve is based on the assumption that as goods increase in price people buy less of them. But if those goods are status goods, the higher price might increase demand (superior branded clothes might be an example).

Kesting argues that the two curves might again meet at an equilibrium point, although each is the mirror image of that suggested by orthodox economic theory.

The easy way in which the most basic apparently scientific formulation of neoclassical economy theory can be turned on its head in this way indicates clearly the vulnerability of the whole house of cards by which our complex global economy is justified.


  1. How many products will actually have two intersections?

    To make this idea valid, a product would have to be sold at a lower price, then the price raised above cost and inflation and then demand to rise as a result.

    Problem with status goods is it needs to be launched at a high price. Raising the price would not have the same effect, I'd wager.

    I have an open mind, so empirical proof of raising the price of an established good raising the demand would be of interest.

  2. Molly,

    I want to preface this by saying that I know zip about economics. After reading your statements and looking at the graph I thought there was an implied temporal aspect to the graph, meaning you read the graph from left to right with the left side representing an earlier time that the right side. After I thought about it a little I realized that time might not enter into it. If that were the case, however, terms like “increase” would have no meaning because they imply change through time.


    Your last sentence got me thinking about Jevons Paradox (as I understand it-----or don’t) and how it might relate to your graph. I think Jevon said that intuitively you would think that as the efficiency improves in the use of an energy product less is used per unit of work. He was talking about coal, but his idea applies even more to oil. That should mean that there would be more available (increased supply) which should, according to your graph, have a concurrent reduction in demand. However, as Jevon noted, that was not the case. Instead, if we improved efficiency we use more (greater demand) rather than less.

    If my understanding is correct, then the graph you show (which looks like this...“X”) would not reflect the nature of economics vis-a-vis energy (particularly oil). Nor would your idea about a mirror image (“XX” ..... if you will) be the case. Instead the whole thing would better be graphed with forward slash symbols (“//”), until eventually it reverses into backslashes (“\\”) after peak oil. You probably guessed that I think that was in 2005 and we are just starting down the backslash phase. The double backslashes would represent a reduced supply, which crashes the economy, which results in a reduced demand because nobody can afford anything.

    I obviously don’t fully understand the graph you’ve presented so this comment might best be a description of “why the masses listen to economists with the same intensity as they listen to witch doctors.” The whole thing is obviously way above my pay grade, however, the masters of the universe don’t seem to understand it very well either.

    Michael Irving