Comment by jessaustin | Hacker News Reader

Comment by jessaustin | Hacker News Reader

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...assuming prices are driven by supply and demand, and there are no demand shocks, then total revenue must go down. That is econ 101.

If that's what you learned in that class, you should ask for a refund. If the demand curve is relatively steep (i.e. not elastic), then a supply shock (e.g. a drought) could change price drastically while changing quantity very little. This is not an uncommon situation, especially with respect to food commodities.

[EDIT:] Haha whoops! I certainly didn't intend to tell you anything about your own field. I think that in this case you might be missing important details about the situation on the ground. Irrigation water isn't auctioned off to the highest-bidding farmer. Rather, different farmers have rights to various amounts of water, and those rights are ordered so that some farmers will get nothing in a drought while others will get the same amount they get every year. So, while the industry as a whole has not profited from the supply shock we're discussing, the "lucky" farmers with senior water rights certainly have.

I actually have a PhD in economics. You are right that revenue can increase due to a supply shock. What I should have said is that revenue net of costs can never increase due to a supply shock. Because of this, the full statement this could conceivably even increase the total revenue of almonds sold -- leading to increased incentives to bring more acreage into production is still wrong.

Consider the limit as demand becomes (locally) infinitely inelastic. Then a shift of input costs of X will cause the price to change by X. Total volume (call it Y) of goods sold stays the same and total revenue increases by YX. Total revenues net of costs remain the same since total costs increased by YX.

The main point here is that markets don't do weird counterintuitive things, at least in a partial equilibrium analysis. Shocks to the costs of inputs always result in less production and less profit.

[Reply to edit] No offense taken, I shouldn't have said "econ 101" in the first place since it could be interpreted as disparaging. What I meant is that once we accept the assumptions of partial equilibrium analysis, it really constrains what can happen, and it can be shown by simple well known theory. And you were right, I wrote "revenue" when I should have written "profit".

I'm sure that what you are saying about water rights is true, but I'm simply arguing that the increased "cost" of water must move the supply curve of nuts up (at every point) not down. This shift of the supply curve might cause some people to stop growing and others to start, there is nothing in the theory that contradicts that. But everything in this thread still fits into partial equilibrium analysis.

Well maybe next time you could read a bit more about the situation, before hauling out the neoclassical big guns on us. Anyway I don't think anyone has suggested that the supply curve for nuts has moved down. You got confused because you made assumptions about that, based on limited information about the supplies of necessary inputs to nut production.

I think that the issue is that I only wanted to critique the following line of argument:

CA farmers are increasing nut trees acreage because nut trees require a lot of water, and thus nut prices are going up in the current drought, and thus the farmers are rushing to increase the production of such profitable product. (Heard on NPR)

Taken by itself, this contradicts neoclassical economics, no matter how charitably you read it. If it were implied there were more complex mechanisms whereby acreage increased even while total production decreased (as neoclassical economics implies it must), then the statement could not use the words "because" and "thus" in the way it did.

You and others have implied that I was wrong because the conclusion that nut tree acreage increased is still possible, but I never said it wasn't. I think it's perfectly fine, and important, to critique an argument as opposed to a conclusion. If I let this slide, then should I also nod and smile when someone argues that people should buy local since it makes everyone richer?

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