The hottest Price theory Substack posts right now

Economic models have two main parts: how people behave and how those behaviors interact in the market. Understanding both helps clarify how markets operate.
Equilibrium in economics doesn't mean everything is still. It's about finding a way to make individual choices work together, even in changing situations.
Critiques of economics often focus on rationality, but understanding the constraints, like budgets, is more important in predicting market outcomes.

Some people think inflation is good because it helps prevent deflation, but this argument is weak. Deflation can be harmful mainly when caused by poor policies, not just by falling prices.
Inflation is often compared to a hidden tax because it decreases the value of money. Unlike regular taxes, people might not realize their purchasing power is being reduced until they feel the effects.
Overall, inflation can create confusion and make economic decisions harder. It undermines the value of money as a reference point, leading to more mistakes and inefficiencies in both personal and business finances.

Understanding finance is really important for macroeconomics. It helps us figure out how markets work and how different factors impact the economy.
The no-arbitrage principle in finance shows that prices should adjust quickly to eliminate profit opportunities. This means that if something is cheaper in one place, it won't stay that way for long.
We can analyze macroeconomic theories using tools from price theory. This allows us to test predictions and better understand how things like interest rates and asset prices relate to the economy.

Inflation is when prices keep going up over time, not just a one-time price hike. This shows that inflation affects the overall economy and not just individual items.
Measuring inflation involves looking at how much purchasing power money loses. When money loses value, prices generally rise, which means inflation is happening.
It's important to consider how supply and demand for money influence inflation. Understanding this can help people assess the real causes behind rising prices and not just blame specific products.

Understanding whether inflation is caused by supply issues or increased demand is key. Supply-driven inflation leads to less output, while demand-driven inflation increases prices and output together.
Nominal GDP growth is a useful measure to determine the cause of inflation. When nominal GDP increases alongside inflation, it usually indicates demand-driven inflation.
Asking sellers why prices are rising often misses the real cause. Increased demand can look similar to supply issues, so it's important to analyze economic data carefully.

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The UCLA brand of price theory focuses on transactions instead of just markets. This means they look closely at the details of how transactions happen and what impacts those processes.
Transaction costs are key to understanding decision-making in economics. Knowing how transaction costs affect choices helps explain why some actions happen within firms and others happen between them.
Property rights play a significant role in transaction costs. The restrictions and rules around property ownership can impact decisions and the nature of transactions.

Lab-grown beef becoming a closer substitute for conventional beef can impact the supply of hides available for leather, affecting industries like luxury fashion.
The theory of joint production explains the interconnectedness of markets where goods share production inputs, highlighting how changes in demand for one output can affect others.
Understanding joint production in economics goes beyond standard supply and demand models, revealing complex relationships and teaching humility about the real-world supply chains.

Gold has historically maintained its value, with an ounce consistently able to buy a good suit, showcasing its reliability as a measure of value.
On the gold standard, dollar value was linked to a set amount of gold, ensuring a stable price for gold over time.
Fluctuations in the supply and demand of gold do not impact the long-term value of gold as a reliable measure of value.

Using supply and demand to explain observations can be overly flexible and lead to pure sophistry in economics.
Models based on implicit agreements, folk theorems, and coordination failures can be unfalsifiable and offer no predictive power.
When evaluating economic theories, it's important to consider if they can provide meaningful predictions and not just overlapping explanations.

Peter Diamond shows that unrealistic economic models can help us understand real-world issues. By making certain assumptions, we can see how they lead to surprising outcomes.
In his models, costs of searching for products can lead to prices behaving differently than expected. This means even in competitive markets, prices can be high if searching for the best deal is costly.
Diamond’s examples suggest that different economic situations can lead to multiple levels of unemployment. People's expectations play a big role in how prices and unemployment behave in the market.