DEMAND AND SUPPLY OUTPUT  

AS AN ISSUE OF THE COST-BENEFIT FUNCTION

 

 

In classical economics we have:

 

1) E = f (Q, D)

 

i.e., Economics is the function that exists between Supply and Demand.

Whereas: Q = P + S; having P = Product Flow, and S = Product Stock.

Considering that in modern economies the quantity of Product Stock represents a further cost because of immobilisation of assets, we shall assume that the function stated under 1) has to be restated as:

 

2) E = f (P, D)

 

in which:

 

P = Production Flow, which includes Work in Progress (WIP) Product in Transit (PIT) and Product in House (PIH).

 

Therefore, if

3) P > D = Loss

because of excess product

 

4) P < D = Loss

because of profit missing

 

than it shall be

5) P – D = ≈ 0

i.e., Production minus Demand shall be approximately equal to zero. This equation represents the ideal condition in all economies.

 

Furthermore, in order to have the lowest unit cost, we need to produce the highest quantity producible.

Therefore, having:

6) E = f (Pmax, Dmin)

then companies have a loss because of the excess of production. This unbalance can take to price inflation because of cost.

On the contrary, having:

7) E = f (Pmin, Dmax)

companies have a loss because of lost profits. This unbalance can take to price inflation, because in a free market price increase is the only way to select and rebalance Demand.

Then, we can conclude that:

8) E = f (Pmax, Dmax)

is the ideal equilibrium of the market.

Only under this condition unit cost is the lowest; therefore unit price can be the lowest. Such a condition is pertinent only to free markets. Monopolistic and/or Monopsonistic markets do not follow this rule. Therefore, both of them cannot be considered as the physiology of the economy, but only pathology of it. In this latter case they shall be extirpated, as any other disease.

 

9) P = {na, en, la, tc, fc, ri}

i.e., Production is a definite set, whose elements are:

– na = natural resources (water, land, sun, air, minerals, raw materials, environment, etc.)

– en = ntrepreneurship

– la = labour (manual or intellectual)

– tc = technological capital (technology)

– fc = financial capital (money)

– ri = risk (venture capital, natural risk, technical obsolescence.)

 

Because P is a set, then the element of the set cannot be in an additive and/or diminutive order (in that case, even if any element’s worth is zero, the set still exists, which is false), but in a multiplicative order, and all of them tend to the same direction, the same scopes (production maximization, and cost minimization)

Therefore, the elements of the set are not scalars, but vectors.

Scalar is a quantity that has size but not direction (real numbers are scalars). By contrast, a vector is a quantity that has both magnitude and direction.

Therefore, we can rewrite the formula under 9) more accurately as follows:

→   →  →  →  →  →

10) P = {na, en, la, tc, fc, ri}

 

In this set all vectors shall go to a same strange attractor, which is the ideal state of a company: maxim profit, which indicates at once utility, and efficiency of the company itself.

 

External elements can divert these vectors from their attractor. These elements are Culture and Power. US culture is different than Japanese, European, and African Culture, and such a difference influences, of course, the quantity and quality of companies’ production in their different economies.

Furthermore, any external power imposition, such as military power, political power, religious power, and so on, can divert production vector from their attractor. Any tax system is an external element to production function, ant it represents an extra cost, which can facilitate or restrict any production. Money supply works tax like, because the interest rate connected to loans represents an extra cost to companies.

 

At the beginning of humankind human beings were only wandering consumers of the products that they got from nature. When they realized that to wander and to jeopardize their existence because of a total dependency from nature, they began to cultivate fields and to breed animals. At that time, therefore, the two elements of production function were nature and entrepreneurship, where an entrepreneur was any individual who produces by him the technology (tools), the capitals (seeds), the labour (his arms) needed to cultivate or to breed, and overall he took all risks on himself.

Therefore, entrepreneurship has been and still is the ability of transforming nature into useful product for oneself and others.

 

Enrico Furia

School of World Business Law

 

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