Thursday, September 27, 2007

Q: What’s the difference between an economist...

...and a befuddled old man with Alzheimer's?
A: The economist is the one with the calculator.

Quick lunch break at client site. Need to post something original or I may have an aneurysm.

A while ago on another blog, someone put forth a business model involving individual investment in a particular method of clean power generation. One of the commenters said:

… the one problem with your plan is that it doesn't take into account economics.
If the entry barriers were lowered for producing power (ie. limited capital required, fewer government regulations, no technical ability required, etc), then more and more people would start these [power generators] in order to make money.

Assuming demand for energy is held constant two things will happen;

1) the cost to produce will increase as more [generators] are built, rent will
increase, maintenance prices will increase (since there is more demand for
replacement parts and services), etc, and

2) your profit will decrease as more competitors come on the market with the same product, at some point we will exceed demand. At that point some [generator] owners will accept a lower profit margin, selling the power for less money, in order to differentiate themselves.
Soon enough people progressively charge less and less until you are making just
enough money to cover costs.
These two economic concepts would pretty much render this (in the long run) to be a bad investment as you would have no way to establish and maintain a competitive advantage over all the other [generators] that would inevitably come onto the market.


Now, I’m not an economist (bet that's a surprise). But the above sounds really really stupid to me -- by that reasoning, no one makes money anywhere long-term.

It sounds like most of the rest of economics as I understood it from the one Econ class I took: there's an awful lot of circling the bulls-eyes, post-hoc reasoning, and predictions that don’t come true because there are too many variables.

The above reminds me of the joke where the Econ professor and a student are walking across campus – the student says “Hey, look, a $20 bill on the ground!” The professor says “Impossible – someone would have picked it up.”

4 Comments:

At Fri Sep 28, 12:04:00 PM PDT, Blogger Irma said...

This was rather confusing to me, just like my Econ 101 class in college. But sure wouldn't want you to have an aneurysm! Liked the jokes, anyway.

 
At Mon Oct 01, 09:19:00 AM PDT, Blogger Erik said...

that joke is funny. :)

about the commenter: i'm siding with you on this one, you might be happy to know. it sounds to me like he spends ten minutes summarizing capitalism and then says, "in conclusion, no one makes money using this system, because as i expalined before, this is capitalism. which of course doesn't work, as you can see by the fact that we are the richest country in the world."

He's probably an econ professor...

 
At Tue Oct 02, 08:46:00 AM PDT, Blogger blogball said...

I agree. Couldn’t you say that about a new or product or invention?
Why invent a car when you have to build all of those roads & highways etc.

I once asked an economist for her phone number..and she gave me an estimate.

 
At Thu Oct 04, 06:58:00 AM PDT, Blogger MollyB, Bloggerin said...

Sounds like dismal is a gooooood thing. That's what Martha said!

 

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