I’m arguing that the super-long term supply curve is virtually flat (the price elasticity of supply is arbitrarily high).
Yes you are. And I think this is wrong. And here is why (stated differently from my original reply which also thought it was wrong).
Consider a world in which the entire demand for chickens is one guy who lives on the island of Kauai. In Kauai, chickens run wild through the streets and yards and fields. Since there is this one guy who buys a chicken every week, the shopkeeper scoops up a chicken in his yard on his way to work whenever he knows his chicken customer is coming. Cost of production, close to zero.
Consider an alternative world in which everybody is eating a chicken every day. The chicken producers certainly buy up lots of land in low cost places where it is cheap to build chicken production. This doesn’t fill the need, i.e. price is way above the marginal cost to produce the last chicken. So they build chicken production closer to centers of demand, where real estate and labor are more expensive. This doesn’t meet demand, i.e. price is still higher than the marginal cost to produce the most expensive chicken. Finally, someone builds 10 level chicken coops with HVAC systems, water desalinators to provide drinking water to the chickens, and pays a fortune to process the chicken poop into a benign fertilizer product which they essentially have to give away in order to keep it from stacking up around their chicken coops. Finally demand is met.
The point is, demand is filled by suppliers that pay different costs to create the chickens they sell. The cheapest producer makes the most profit, he is lucky. The most expensive producer makes just enough profit to keep producing, the slightest drop in price will put him out of business.
Even within a given production facility, the marginal cost to produce an extra chicken rises as the “capacity” of the production facility is filled. So for the christmas rush, 10% more chickens are grown, but it raises the costs of the facility 15% because they are paying night-workers instead of day workers, they are having to build dormitories to house their extra workers, they need a higher quality of automation in order to get 10 chickens per cubic foot instead of 8 chickens per cubic foot which their cheaper robots manage, etc.
So in a world where everybody wants chickens a lot, people will spend more to consume chickens because they will spend more to produce chickens, because the cheapest production sites and methods will be saturated before the market is.
I think your scenario is a good illustration of “finite inputs”, which I listed as one of five example ways in which the long term supply curve may not actually be flat (at the end of the original article).
While I think that finite supply is a very real force (that, if strong enough, would create significant long term price elasticity of supply as you claim), the other four examples I mentioned also seem very real to me, and it’s not obvious which ones win out for any particular industry.
If Cost always grew with industry size, products in big industries would always cost more than the same product from equivalent but smaller industries (where both supply and demand is reduced). Intuitively/anecdotally this doesn’t seem to be true; I think the most common reasons it’s not true are “gains to scale”.
Looking at the extremes doesn’t tell you that chicken production is an increasing-cost industry at the margin. Sure input costs are important (the OP agrees—see last section), but there are also economies of scale, R&D investment, and so on pushing the other way, so it’s ultimately an empirical matter whether chicken production is increasing- or decreasing-cost at current levels of production (again I’m just repeating what the OP says).
IMO this issue is actually less relevant than the OP seems to think, because we’re only talking about very small marginal changes to chicken demand, and there’s no way the long-run supply curve is steep enough for that to matter. But one could try to estimate the long-run supply curve at least “locally”, which might settle this issue.
Yes you are. And I think this is wrong. And here is why (stated differently from my original reply which also thought it was wrong).
Consider a world in which the entire demand for chickens is one guy who lives on the island of Kauai. In Kauai, chickens run wild through the streets and yards and fields. Since there is this one guy who buys a chicken every week, the shopkeeper scoops up a chicken in his yard on his way to work whenever he knows his chicken customer is coming. Cost of production, close to zero.
Consider an alternative world in which everybody is eating a chicken every day. The chicken producers certainly buy up lots of land in low cost places where it is cheap to build chicken production. This doesn’t fill the need, i.e. price is way above the marginal cost to produce the last chicken. So they build chicken production closer to centers of demand, where real estate and labor are more expensive. This doesn’t meet demand, i.e. price is still higher than the marginal cost to produce the most expensive chicken. Finally, someone builds 10 level chicken coops with HVAC systems, water desalinators to provide drinking water to the chickens, and pays a fortune to process the chicken poop into a benign fertilizer product which they essentially have to give away in order to keep it from stacking up around their chicken coops. Finally demand is met.
The point is, demand is filled by suppliers that pay different costs to create the chickens they sell. The cheapest producer makes the most profit, he is lucky. The most expensive producer makes just enough profit to keep producing, the slightest drop in price will put him out of business.
Even within a given production facility, the marginal cost to produce an extra chicken rises as the “capacity” of the production facility is filled. So for the christmas rush, 10% more chickens are grown, but it raises the costs of the facility 15% because they are paying night-workers instead of day workers, they are having to build dormitories to house their extra workers, they need a higher quality of automation in order to get 10 chickens per cubic foot instead of 8 chickens per cubic foot which their cheaper robots manage, etc.
So in a world where everybody wants chickens a lot, people will spend more to consume chickens because they will spend more to produce chickens, because the cheapest production sites and methods will be saturated before the market is.
I think your scenario is a good illustration of “finite inputs”, which I listed as one of five example ways in which the long term supply curve may not actually be flat (at the end of the original article).
While I think that finite supply is a very real force (that, if strong enough, would create significant long term price elasticity of supply as you claim), the other four examples I mentioned also seem very real to me, and it’s not obvious which ones win out for any particular industry.
If Cost always grew with industry size, products in big industries would always cost more than the same product from equivalent but smaller industries (where both supply and demand is reduced). Intuitively/anecdotally this doesn’t seem to be true; I think the most common reasons it’s not true are “gains to scale”.
Looking at the extremes doesn’t tell you that chicken production is an increasing-cost industry at the margin. Sure input costs are important (the OP agrees—see last section), but there are also economies of scale, R&D investment, and so on pushing the other way, so it’s ultimately an empirical matter whether chicken production is increasing- or decreasing-cost at current levels of production (again I’m just repeating what the OP says).
IMO this issue is actually less relevant than the OP seems to think, because we’re only talking about very small marginal changes to chicken demand, and there’s no way the long-run supply curve is steep enough for that to matter. But one could try to estimate the long-run supply curve at least “locally”, which might settle this issue.