Joint and composite demand and supply

Book 5, Chapter 6

§1. A consumer demanding a good from a producer thereby creates derived demand for the inputs to produce that good. In most cases, inputs are not interchangeable (100% substitutes), which means they are joint (or complementary) with other inputs, with all supplied in stable proportions. Thus, the absence of one input can halt overall production, e.g., trying to make beer without hops.

§2. A missing factor (production input) will lead to increased prices for that factor if (1) the factor cannot be replaced (no substitutes), (2) consumers cannot do without that good (thus, they will pay more rather than go without), (3) the missing input plays only a small part in the price (meaning producers able to find some of that input can pay more for it without raising the product’s final price by much), and (4) other inputs can be acquired for lower prices, leaving extra space to pay for the scarcer input. In sum, a scarcer input will still be used if it’s an essential but small part of the production process.

§3. Composite demand for an input results from the summation of demands from all producers using that input for their consumer products.

§4. A joint product produces different goods for different markets (e.g., oil can be cracked into gasoline and lubricants). If the price of one product is significantly higher than that of the other, then producers will focus on it over the other. If demand for the more valuable product collapses, then the less-valuable one will be more scarce, driving up its price.

§5. Marshall uses many figures and mathematical logic to explain joint and separate contributions to supply and demand, but I find these uninteresting. It’s important to understand complements and substitutes on the supply or demand side, but I think it’s quite difficult to work out their exact (financial or mathematical) relations, even with the best data.

§6. Those who demand or supply one input might benefit from lower (or higher) demand or supply for substitutes or complements, and they will lobby for laws and regulations to favor themselves, thereby distorting broader markets.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Interesting stuff

  1. Why you should install Signal and ditch WhatsApp (and probably Telegram)
  2. There is something different in the United States today, and I know that you feel it; something noxious, toxic, sick, diseased, and most of all decadent. The wealthiest nation on Earth with such iniquity, where pandemic burnt—still burns—through the population while the gameshow host emperor froths his supporters into bouts of political necromancy.”
  3. Miami Will Be Underwater Soon. Its Drinking Water Could Go First
  4. The burdens of paperwork are growing heavier 
  5. Amsterdam, the beauty.
  6. A fascinating documentary about Shenzen, shanzhai (copycat innovation) and how (some) Chinese see “IP-theft” as “open sourcing” (spin?)
  7. A fire historian explains why California’s burning is mostly about people encroaching on areas that burn naturally  [paywall]
  8. Iceland’s viking culture explains why they offer coffee & cake to visitors 🙂
  9. How Are Psychedelics and Other Party Drugs Changing Psychiatry?

H/T to CD

Equilibrium of normal demand and supply, continued, with reference to long and short periods.

Book 5, Chapter 5

§1. “Normal” prices in markets for goods, services, labor, etc. can be pushed up or down to “abnormal” levels by technology, time, changes in season or tastes.

§2. Economists gain insights by via “ceteris paribus” (holding all other things equal) analysis that allows them to ignore complexities while focussing on the most important causal factors. Results are “cleaner” with more controls but less realistic. Marshall cautions against abuse (p 306):

But nothing of this [the world standing still] is true in the world in which we live. Here every economic force is constantly changing its action, under the influence of other forces which are acting around it. Here changes in the volume of production, in its methods, and in its cost are ever mutually modifying one another; they are always affecting and being affected by the character and the extent of demand. Further all these mutual influences take time to work themselves out, and, as a rule, no two influences move at equal pace. In this world therefore every plain and simple doctrine as to the relations between cost of production, demand and value is necessarily false: and the greater the appearance of lucidity which is given to it by skilful exposition, the more mischievous it is. A man is likely to be a better economist if he trusts to his common sense, and practical instincts, than if he professes to study the theory of value and is resolved to find it easy.

§3. Marshall recommends starting with a stationary state before introducing “partial perturbations,” which is now known as partial equilibrium analysis.

§4. He then explores how the prices of fish might vary in the short, medium and long terms. In the short term (day-to-day), prices rise and fall with weather, “meatless Fridays,” etc. When looking at the medium term (~2 years), these fluctuations might cancel out and they can be should be ignored while examining the impact of, e.g., a fall in demand for beef due to a multi-year plague that increases demand for fish. In such a case, prices will rise and stay there (should people permanently change their taste for beef) until long-term adjustments (e.g., more boats and fishermen) increase supply.

§5. Producers will consider time when responding to abnormal prices. In the short run, marginal producers will work harder to add more quantity to the market while incumbents enjoy excess profits from above-average prices. If abnormal prices look set to endure, then producers will alter their capital mix to fit the “new normal.”

§6. Producers will sell at a loss in the short run (e.g., when higher production costs cannot be recovered in prices), but not without considering impacts on the market, competition and their long-run (capital) costs. Marshall cautions: “he [the producer] regards an increase in his processes of production [VC and FC], rather than an individual parcel of his products [VC], as a unit in most of his transactions. And the analytical economist must follow suit, if he would keep in close touch with actual conditions” [p 312]. Economists should not let their theory stray too far from reality. In modern industrial organization, it’s “continue to produce while pq>c(q) — even if pq-c(q) < fc — but shut down if pq<c(q).”

§7. In the long run, investments in production capacity depend on the expectation of profits. Changes in those perceptions thus impact changes in long run supply, in terms of prices and quantities.

§8. Thus, Marshall concludes, short-run supply depends on current capacity whereas long-run supply allows for changes in capital and thus capacity. In both cases, prices also depend on changes in demand (tastes) as well as technology, which affects both supply (more efficient production) and demand (via the appearance of competing substitutes).


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Interesting stuff

  1. Fossil fuel companies are dying, and that’s good for the environment
  2. Back in 1920, we knew how to reduce the pandemic spread
  3. So many forecasts are not even close to right
  4. Rapidly melting ice means we are facing a big (not included in IPCC) risk of non-linear sea level rise (e.g., +5 meters in 10 years).
  5. Looking back 50 years on shareholders vs stakeholders
  6. How Republicans used local elections to “queer the pitch” in national elections (via gerrymandering)
  7. Airlines are pushing for 30-min preflight C-19 antibody tests. I can see the profit motive. Let’s hope there’s also a penalty for being too lax on false-negatives.

Review: Bad Blood

I’d heard about this book — the story of the rise and fall of Elizabeth Homes and her company Theranos — long ago, but I only decided to read it when preparing readings for my course, The World of Entrepreneurs. I wanted to understand her case, as an example of the dark side of Silicon Valley —  not the side of “fake it until you make it” —  but the side of “lie to everyone, about everything, if that gives you an advantage.”

Aside: I worked in three start-ups in Silicon Valley, of which two were dominated by frauds of the “funding secured” and “vaporware” models, respectively, so I have a real interest in similar stories. That said, I am pretty sure that at least 80% of start-ups are, on the whole, legitimate (read this review). The trouble is not the really bad apples — Theranos and WeWork being recent examples — but those that cut corners as a “necessary part of doing business” — Facebook and Uber being high on that list.

This review will be short because Carreyrou is such a good writer and the story comes at a fast pace. What strikes me are the following:

  • Elizabeth Holmes was an aggressive, ambitious founder who wanted to change the world and become rich and famous. Her challenge was reality. She preferred to ignore inconveniences and distorted reality to convince others that she knew what she was doing, i.e., building a machine that could run 200 blood tests based on a finger-prick sample of blood. Outside scientists told her that her goal was impossible, due to physics and chemistry. Inside scientists, lab workers and “beta-test” doctors said her machine was not working or viable. Rather than listen, she lied about using commercial equipment to do the tests supposedly run on her machines and ignored the dangers of bad results from her machines. (One million tests later deemed “inaccurate” translates into one million stories of false positives, false negatives and needless suffering.)
  • Holmes was aided and abetted by Ramesh Balwani, a boyfriend who assumed that his luck (presence) in an earlier start up made him a visionary. Balwani and Holmes bullied staff, fostered a culture of paranoia, and sent lawyers after whistleblowers seeking to protect investors and the innocent. Different product teams were separated, which limited their ability to spot the fraud but also their ability to find solutions. Lawyers like David Boies worked hard to threaten whistleblowers because they were paid in shares. Holmes recruited a bunch of famous old white men (George Schultz, Henry Kissinger, Rupert Murdoch) whose “halo” protected her company from awkward questions.
  • The end came when an anonymous insider brought the story to Carreyrou, whose investigations resulted in Theranos’s tests being suspended, arrests and trials. Holmes was not a disruptor; she was caught wearing “the Empress’s new clothes.” The women who saw herself as the next Steve Jobs was actually just another blonde grifter.
  • Holmes’s most recent defense is that she’s mentally unfit to face charges. Given her history — and 2019 marriage to the male heir of millions — I assume her defense rests on more lies. (I also worry about her husband, especially if he has a high-value life insurance contract.)

My one-handed conclusion: Read this book if you want a fast-paced story of how self-delusion, greed and privilege (high-priced lawyers who will defend your lies) can allow someone to get away with “statistical murder” (all those wrong tests surely resulted in more than one death). FIVE STARS.

Update (2 Oct 2021): Read Carreyyou’s thoughts on Holmes’s trial


Here are all my reviews.

The investment and distribution of resources

Book 5, Chapter 4

§1.Marshal begins with a simple example of a man building his own house, which he uses to explain how present costs must be less than (expected) future benefits, which are “normalized” (discounted to net present value) via a “sort of compound interest.” I find this beginning quite interesting, since I am now teaching students about cost-benefit analysis and discount rates!

§2. Expanding to the example of a businessman incurring costs now for potential (risk-adjusted) future benefits, Marshall explains how present values are “aggregated” to future values, whereas future values are “discounted” to present values, with the net benefit being calculated at the same point in time.

§3. Competing businessmen will change their mix of inputs in an attempt to find a cheaper means to the same end. Their profit-seeking searches increase efficiency and thus deliver “progress.”

§4. Marshall gives examples of a housewife or house builder changing their mixes of products and inputs, to maximize net benefits. These substitutions are mathematically equalized via “marginal products” that both implicitly understand as if solving equations.

§5. A businessman must recover both “prime” (variable) and “supplementary” (fixed) costs when pricing products for sale.

§6. In the short run, a product’s price need only cover variable costs, but revenues total sales must cover fixed costs in the longer run, if the business is to continue.


This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Interesting stuff

  1. Maybe we should read fewer books, better?
  2. Why Karachi floods
  3. How to escape a volcanic eruption
  4. Surprise! (Not!) The plastic industry came up with “recyclable plastic” to confuse consumers and sell more “virgin” plastic
  5. Western US wildfires are exactly what climate scientists predicted and people can’t accept this new world of smoke and fire Get used to it.
  6. How Taiwan successfully (so far) contained Covid and a great sad summary of how the US (185k+ deaths) is failing
  7. The death of the office economy — many interesting dimensions
  8. Many of Trump’s have zero interest in reality
  9. Dr. Daniel Pauly on why overfishing is a Ponzi scheme” Insightful!
  10. Is the US going through a “mega cycle” of disruption?
    “American politics has fallen into a pattern that is characteristic of many developing countries, where one portion of the elite seeks to win support from the working classes not by sharing the wealth or by expanding public services and making sacrifices to increase the common good, but by persuading the working classes that they are beset by enemies who hate them (liberal elites, minorities, illegal immigrants) and want to take away what little they have. This pattern builds polarization and distrust and is strongly associated with civil conflict, violence and democratic decline.”

Your tourists or your life

Frank writes*

A flight from Eindhoven to Berlin: 50 euros.
The extra revenue for Berlin’s economy: 300 euros.
Climate change caused by the plane’s emissions [pdf]: 5 euros.
That picture of you, with the Brandenburger Tor: priceless.

Or is it?

Direct emissions from aviation are responsible for roughly 3% of the total carbon dioxide emissions in the European Union. Compared to other forms of public transport [pdf], air travel is one of the most carbon intensive methods of movement. Meanwhile, according to the International Civil Aviation Organization, the number of flights and the total emissions by the industry are only projected to grow in the near future.

Photo by dsleeter_2000 via climatevisuals.org

In the light of climate change, this has led some to oppose flying, such as flight shaming. According to a survey by the European Investment Bank, a majority of EU citizens favor a ban on short-distance flights. Dutch politicians prefer a European tax on flying, which will result in higher prices that will reduce demand for flights.

European tax legislation is notoriously hard to pass, requiring unanimous approval by all 28 members. Therefore, the Netherlands are planning to introduce a national flight tax. However, a national flight tax introduces its own unique downsides, with the main concerns regarding capital flight (pun intended) from the aviation and tourism industries.

Academics like William Nordhaus, recipient of the 2018 Nobel Memorial Prize in Economic Sciences, argue that we must not “[burn] down the village to save it”. They assert that while the impacts from climate change may be grave, we should also consider the impacts of those measures which we take against it, which can impact the same groups as climate change. According to research by TU Delft, CO2 reductions may not be as large as some proponents boast, but economic damage might also be smaller than opponents fear.

Bottom line: We should not blindly pick one option, but rationally weigh the range of alternatives which we can choose from. This brings about a whole other range of concerns regarding sensitivity to assumptions and decisions on parameters like discount rates, but these fall outside the scope of this blogpost. We may choose to face the full cost of flying to Berlin, and potentially stay home instead, or we may choose a selfie with the Brandenburger Tor. But choose, we must.


* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

The importance of whale poo

Marina writes*

One of the more important actors in the carbon cycle of the world are phytoplankton. Thinking on a global scale, two big carbon sinks stand out. Namely, vegetation and the oceans. Phytoplankton are responsible for most of the transfer of carbon dioxide from the atmosphere and into the oceans, via photosynthesis that produces half the oxygen on Earth.

Phytoplankton also form the foundation of many aquatic food webs. They are food for zooplankton, crustaceans, small sharks, whales and other big fish and mammals indirectly Unfortunately, phytoplankton are disappearing. Research shows that there is a 40 percent reduction in the global phytoplankton population since the 1950s. The rise in global sea temperatures is thought of as the main driver of decline. But much more research is needed to understand the reductions of these populations.

Whales, similarly, act their part in the carbon cycle. This is also referred to as the ‘biological pump’, or the ‘whale pump’. This process removes carbon and nitrogen from the sunlit zone of the sea and sends those elements downwards through a downward flux of aggregates, feces, and vertical migration on invertebrates and fish. Whales, in the process of foraging deep in the oceans and coming up for air to breathe, release nitrogenous nutrients through their urea (pee) and fecal plumes (poo). That process means more nutrients for primary producers such as phytoplankton. Additionally, when whales die, they sink to the bottom of the ocean, taking all that accumulated carbon with them. The whale carcasses also act as a host to a variety of species, such as snails, mollusks and bacteria that live on the bottom of the ocean.

This nutrient cycling has important implications for policy makers, as healthy whale populations can potentially slow or stabilize the decline of phytoplankton and other species. The real-world implications of slow but irreversible ecosystem changes are difficult to predict. Thus, humans should be extra cautious about the ways in which they interact with their environment.

Bottom line: The example of human impacts on whale and phytoplankton populations shows that we do not fully understand the complexities of ecosystems and our impacts on them.


* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).

The cities of tomorrow

Alina writes*

Cities have become the hubs of human settlement, development, and economic growth over the last two centuries. Globally, urban spaces occupy 1-3% of terrestrial land, yet in 2018, cities accommodated 55% of the world’s population. The percentage is expected to rise to 68% by 2050. Additionally, urban based-economic activities generate an estimated 55%, 73%, and 85% of gross national product in low-, middle-, and high-income nations [pdf] respectively. From these statistics, it is evident that urban environments have become detrimental to natural environments, consuming 78% of the world’s energy and producing 60% of global greenhouse gases. It is critical to make urban landscapes environmentally sustainable in order to mitigate and prevent projected environmental catastrophes.

Eco-cities are a recent urban phenomenon entailing a city built from scratch with a fundamental focus on sustainability embedded in its design, operation, and management.

One example is the Songdo eco-city, which is actually a district within Incheon, South Korea. At its heart, Songdo strives to have a substantially smaller carbon footprint than traditional cities and to be highly energy and resource efficient. Sustainable elements include, but not limited to:

These sustainable aspects sound great on paper. However, it is worth evaluating the extent to which an eco-city is more sustainable than a traditional city.

A major shortcoming of Songdo and other eco-cities is that building an entire city or urban district from scratch is incredibly challenging. It requires a large chunk of empty land which is suitable for urban development and hefty upfront investment costs. Songdo’s capital cost was worth $40 billion making it one of the most expensive private developments in the world.

Additionally, the majority of the cities in the world are already built, meaning they have locked-in unsustainable infrastructure, and are unlikely to be torn down and rebuilt sustainably. Thus, it could perhaps be more beneficial to optimise existing cities by implementing sustainable elements into them rather than creating eco-cities from scratch.

Bottom line: Songdo could be the blueprint of future eco-cities; however, it is still just a pilot version. Eco-cities have considerable potential to solve urban environmental problems, but most cities – which are traditional and non-sustainably designed – will continue to operate unsustainably due to infrastructural lock-ins.


* Please help my Environmental Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice :).