Purchasing Power of Money

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  • #18244
    ber.versiani
    Member

    I’ve just finished watching the lecture 19, on the purchasing power of money and I’ve got a question. Considering that the supply of money in a UME would be regulated by profit just like any other good, the TS (equivalent of the supply curve) shouldn’t be upward sloping? If the PPM is rises (ceteris paribus) there would be incentives for “gold diggers” to acquire (search, etc) more money, which in turn would rise the supply/stock of money. Am I missing something?

    #18245
    jmherbener
    Moderator

    The entrepreneur’s decision to sell a good in the face of actual offers by buyers of his output comes after his decision to begin producing the good in the face of actual offers by sellers of their inputs. His production costs incurred in the past have no bearing on his decision to sell the good to a buyer in the present. At that point, the entrepreneur’s alternatives are to sell the good to buyer A at the current price or to keep the good in anticipation of selling it to buyer B in the future at a more favorable price or to use the good for his personal satisfaction. For this reason, we can depict the seller’s behavior as either supply of the good or reservation demand for the good. At a higher current price offer, he will be willing to sell more (or retain less now) of the good currently, other factors the same. At a lower current price offer, he will be willing to sell less (or retain more now) of the good currently,other factors the same. Analytically, the seller’s behavior can be depicted either as an upward sloping to the right supply curve (from the higher opportunity cost of retaining a smaller amount of the good for sale in the future) or as a downward sloping to the right reservation demand curve. The market-clearing price of the good is determined by the interplay of either supply and demand or total demand (regular demand plus reservation demand) and the total stock. The total stock of housing, or any good, is fixed at any moment in time and therefore, it graphs as a vertical line against various prices.

    For example, the price of a house in my town of Grove City can be analyzed as either the price that equates the quantity supplied with the quantity demanded or the price that equates the total stock of houses with the total demand to own houses.

    Whatever this price happens to be, then house-building entrepreneurs make their production decisions on the basis of their anticipation of what the price will be at the point in the future when houses they start building today are ready to sell and the prices of the inputs they need to purchase to build the houses.

    An entrepreneur’s decision to produce a given good and the decision to sell that good are not synchronous in time. Therefore, the supply curve that, along with the demand curve, determines the price of that good does not also determine production decisions. Production decisions are made by an entrepreneur judgment in anticipation of the future price of that good.

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