Sunday, June 13, 2010

On Demand Curves

Normal demand curves are downward sloping. Lower prices will increase the quantity demanded and higher prices will decrease them. How do monetary conditions affect this? Deflation tells us prices will be lower in the future and falling prices tell us to seek liquidity and delay our purchases, inducing them to fall further. Inflation tells us prices will be higher in the future and rising prices tell us to flee liquidity advance our purchases, inducing them to rise further. Significant monetary conditions can invert normal demand curves and negate normal elasticities. Falling prices can lead to falling demand and output. Rising prices can lead to rising demand and output. They just can't do so predictably indefinitely because our expectations will adapt, but they can do so on the cusp of reversing.

Monetary conditions can be altered and are a necessary condition to a reversal, but are not sufficient in themselves. Expectations must also be changed. It is not enough to change the present if most do not believe you have the power or will to change the future. It is not enough to change the present if expectations are it will all be abandoned and reversed in the future. Demonstrations of power and will, of dedication and persistence, are not purchased cheaply. That can be difficult if you have built your reputation on fighting the opposite problem and don't want to lose it. You can't forget to seek stability, but you have to remember that involves fighting instability of both ends and persisting in this as the job is never done.