You're only looking at half his argument. Nut costs are up, because nut trees are thirsty. Everyon eknows this, so consumers accept that nut prices go up (also nuts are more popular than they used to be). As long as nut prices are going up faster than nut costs, so will nut acreage. It's a mistake to rely on simple supply-and-demand to analyse this situation because laws of supply and demand are generally considered in an atmosphere of perfect competition, and ceteris parabus - all other factors being held equal other than the water cost, in this case. But neither condition is true. Nut pricing is not just a function of production cost, but also of public taste, advertising, availability of substitute goods, and so on.
Nut costs are up, because nut trees are thirsty. Everyone knows this, so consumers accept that nut prices go up
That doesn't make sense. Consumers have no reason to care why prices change. Do you really think that when there is a drought, consumers increase the amount of nuts that they consume at a given price, because they find the price reasonable due to the drought?
It's a mistake to rely on simple supply-and-demand to analyse this situation because laws of supply and demand are generally considered in an atmosphere of perfect competition, and ceteris parabus - all other factors being held equal other than the water cost, in this case.
It's a bigger mistake to assume consumers behave in ways that make no sense, in order to justify someone else's verbal argument (which made no reference to why consumers would act a certain way, and probably didn't even consider the issue).
It doesn't make sense because you didn't read it properly.
Consumers have no reason to care why prices change.
In a world of pure supply and demand considerations that would be true. but as I've pointed out, we don't live in that world. We live in a world where many consumers are experiencing the same drought as the nut growers, and are aware of the impact it could have on prices, either because they live in the same place as where the nuts are grown or because they like to read the news.
Do you really think that when there is a drought, consumers increase the amount of nuts that they consume at a given price, because they find the price reasonable due to the drought?
No, and I didn't say that they did. I said they "accept that nut prices go up." Someone who enjoys nuts will limit their consumption if prices go up so much that the nuts are no longer affordable, but if they only go up a bit that person may consume the same amount of nuts they did before at a higher price because there isn't a suitable substitute. In other words, consumer preferences can result in inelasticity of demand.
It's a bigger mistake to assume consumers behave in ways that make no sense, in order to justify someone else's verbal argument (which made no reference to why consumers would act a certain way, and probably didn't even consider the issue).
Except a) this is an issue I happen to already be familiar with and b) I find consumers' behavior quite rational when I consider the totality of the circumstances.
>In a world of pure supply and demand considerations that would be true. but as I've pointed out, we don't live in that world. We live in a world where many consumers are experiencing the same drought as the nut growers, and are aware of the impact it could have on prices, either because they live in the same place as where the nuts are grown or because they like to read the news.
None of this explains how knowledge of supply shocks would change a consumer's intrinsic demand for nuts.
>In other words, consumer preferences can result in inelasticity of demand.
Earlier you said As long as nut prices are going up faster than nut costs, so will nut acreage
No matter how inelastic demand is, it is impossible for prices to increase faster than costs. In the limit of infinitely inelastic demand, prices increase at the same rate as costs (all costs are passed on to the consumer).
I agree that supply shocks are not changing the intrinsic demand for nuts. Rather, nut popularity happens to be increasing around the same time as a supply shock.
No matter how inelastic demand is, it is impossible for prices to increase faster than costs. In the limit of infinitely inelastic demand, prices increase at the same rate as costs (all costs are passed on to the consumer).
That only obtains under perfect competition, as I already said. I'm not trying to convince you that this behavior falls out of basic economic laws, I'm saying you're looking at it in the wrong context. Please look up the terms perfect competition and monopolistic competition, or we will just be talking past each other.
Re ceteris paribus, I address simliar criticism here: https://news.ycombinator.com/item?id=10064126. The key point is that the original post I was critiquing was already implicitly keeping all other factors fixed. And I only aimed to critique that post's reasoning, not the conclusions it made.
As for imperfect competition (which I'm also familiar with, I have a PhD in economics), I see you mentioned it above but I still don't know why. Even if not sellers were a monopoly or oligopoly, everything I said above would apply, at least in very broad terms. You could probably come up with some demand function such that increasing input costs of a monopolistic producer resulted in an increase in production, but I don't see why you would think that actually applied here.
It's a peculiar thing I've noticed on HN and a few other places where people with slightly-better-than-average understandings of economics tend to congregate:
> I have a model of economics which makes sense to me
> Here is a case in the real world that breaks my model
> The real world must be wrong.
It makes economics resemble religious ideology rather than an attempt to understand and predict real-world behaviors.
I've answered similar criticisms elsewhere in this thread, feel free to respond to them directly. I have a PhD in economics, so hopefully more than a "slightly-better-than-average" understanding of economics.
