Kinetic Principle of Price Fluctuation
The principle of price fluctuation of Choe’s economics is not much different from the price theory of the mainstream economics. In short, when the demand increases more than the supply the price goes up and when the supply increases more than the demand the price goes down. However, Choe’s economics dismisses the various fundamental logics that build up the theoretical footholds of supply and demand that the mainstream economics has identified as very important, which are nothing more than armchair theorems in reality. For example, utility tables, indifference curves, derivation of demand and supply curves from the correlation between marginal cost and average cost are very important theoretical terms in the mainstream economics, but they are absolutely useless in the real economy. What is the use of these terms for explaining the price fluctuations in the real economy? They are only needed for the intellectual play of economists.
Of course, the terms of marginal utility, marginal cost and marginal productivity of the mainstream economics play important roles in understanding the whole economic phenomenon, of which issue will be examined separately at the end of this paragraph. However, these terms are not directly meaningful in reading price phenomena. The terms of marginal utility, marginal cost and marginal productivity are meaningful directly when the price is an absolute value. If the value evolves from an absolute concept into a 'relative concept of cyclical view', the need to distinguish between the natural price and the market price which bothered the classical economists including Adam Smith so disappears and the availabilities of those terms are minimized, They lose their meanings in any kinetic principles. The market price is the dynamic equilibrium price as well as the natural price in Choe’s economics.
In reality, demand and supply as well as distribution are determined by income. The principle of demand, supply and distribution should be attributed to the income theory, not the price theory, because the size of demand and supply as well as their composition and the concentration level of distribution are also determined by the level of income and its variation. It is right that the principle of demand, supply and distribution should be belong to the income theory. Therefore, the price theory of Choe's economics does not deal importantly with the principle of demand, supply and distribution like the mainstream economics.
The principle of price fluctuation in Choe’s economics accepts only the principle that price rises when demand increases more than supply and price falls when supply increases more than demand. Of course, this simple principle alone can not help us to read price fluctuation accurately. Price fluctuation is not caused solely by this simple principle. Price fluctuation occurs both by the chaos principle and the decision principle too. Moreover, the principle of price fluctuation caused by demand and supply is also likely to develop furthermore. Choe’s economics evolves the price fluctuation theory of the mainstream economics as follows in order to read price fluctuation more accurately than ever.
First, demand and supply are triplet with price fluctuation, interacting and influencing with one another. Let's look at an analogy to understand it easily. There are multiple star systems in the universe. One of them is the solar system as planets are rotating around a star like the sun, while there are star clusters which is fundamentally different from the solar system. One of them is binary star system which occupies about half of the stars in the universe. The binary star system operates as if stars play roles as stellar and planetary simultaneously, however, they maintain a constant orbit. Demand, supply and price fluctuation are closely related to each others like a binary star system in the universe and they are mutually dependent to each other. For example, when demand increases price rises to increase supply and when supply increases price falls to increase demand. Changes in demand and supply do not only lead to an unilateral price fluctuation, but the price fluctuation calls for fluctuations in demand and supply, while demand and supply fluctuate price again. These interactions are not determined at a moment but progressed along the path of time while they interact with each other.
Is this a fact already well known by the cobweb theorem? No, it is not. This triplet principle has a different meaning from the cobweb theorem. Economists often come up with math expression when an economic problem is raised, which is the decisive evidence that they are not aware of the fact that price, supply and demand are interacting. Economic mathematics has not been developed yet for this interaction. Self-confidential rhetorics is an appropriate solution to this problem. In other words, it is the rhetorical way to identify the correlation between variables and the process of their reciprocal actions like that C affects A by 1/6, B affects on A by 1/3, if A has an effect of 3 on B, B has an influence of 2 on C, and C has influence of 1 on A. There is no example in the current economics applying this method to price theory. Although game theory can deal with this problem, it tries to find a solution for all. On the contrary, the self-sufficient rhetorics does not seek to find a solution, but only to identify the process. The kinetic principle of price fluctuation in Choe's economics takes the dynamic balance as a study object since the price fluctuation in reality is a dynamic balance.
Second, the sensitivity and speed with which demand and supply respond to price are different. Generally speaking, the response of demand to price operates more sensitively than the response of supply, but the fluctuating speed of demand is slower than the speed of supply. That is, when price rises, demand first begins to decline and supply lags behind but the speed of supply becomes faster than the speed of demand after their responses start. For example, when the price of a pair of shoes rises, the demand responds quickly and the consumption starts to decline. On the other hand, as the price goes up, the supply keeps rising and production starts to increase in earnest after a while because the response speed of supply is faster than demand. These traits are mainly attributed to the burden of additional facility and employment to produce the products. This issue plays a very important role in income fluctuation, so I will go into the details at the ‘Kinetic Income Theory’ later.
Third, there is a time lag between the reaction speed of supply or demand and the reaction speed of price. Generally, the price response is more sensitive than the response of supply or demand. That is, price reacts more quickly to the fluctuation in supply or demand, but supply or demand responds more slowly to change in price. However, the speed and width of the variation are reversed. In other words, the speed of supply and demand fluctuates more rapidly resulting in greater fluctuation than price. These phenomena are common in the real economy.
Fourth, prices of some goods respond more sensitively to changes in supply and demand, while prices of other goods respond less sensitively to changes in supply and demand. Goods that are in a perfectly competitive state often have a price-sensitive response to supply and demand. This tendency often occurs in the primary products such as various natural resources, agricultural products and various financial products of the security market because the suppliers of these goods are more likely to follow the prices than to determine them. In contrast, the supply and demand of exclusively produced goods is insensitive to price fluctuation. The price is fluctuating at a slow pace, of which property appears because the power of the supplier to determine the price is relatively strong. Some goods are often found in the real world of which prices fluctuate at relatively rapid speed responding to supply and demand, while other goods have relatively slow speed. In general, price fluctuations of competitive commodities tend to be sensitive and rapid, while the prices of monopolistic goods do not. This fact should be taken into consideration in diagnosing and predicting the price phenomena.
Fifth, supply and demand are not statistically balanced. This comment denies the whole mainstream economics, but it is the reality. Why do demand and supply balance? There is no reason for them to balance. How can demand and supply always balance with each other, while the demand is determined by the consumer and the supply is determined by the producer? Price balances demand and supply? No, it is not enough. Price drives demand and supply just to move into the equilibrium point. Moreover, the demand and supply differ in the response sensitivity and speed to each other. So how can they always balance?
So is the balance theory meaningless? It is not. There is no static balance between demand and supply, but they are almost dynamically balanced most of the time. Choe’ Economics regards the constant interactions of demand and supply in order to reach a static balance as a dynamic balance. This term of dynamic balance provides the theoretical foundation that transforms economics from statics to dynamics. Demand and supply are not always balancing on a static basis but they are moving toward balance. This fact must be kept in your mind in order to understand the price phenomena more easily and more accurately, which is essential to diagnose and predict the flow of the economy.
The fact that demand and supply are not always in a static balance leads to a completely different interpretation on price fluctuations. In other words, what is most important in the price phenomena is to see which variable leads the others. Specifically, it is very important in the price phenomena whether supply and demand lead to price fluctuation or price fluctuation leads to supply and demand, and whether demand leads to supply or supply leads to demand. Let's take a look at some real-life examples.
In 1979, just after the second oil crisis, the average price of oil imported by Korea was about $18 per barrel and about $31 in 1980. At those times, Korea's oil consumption was 184 million barrels and 182 million barrels respectively. This does not mean that the price rose since the consumption decreased. The price went up first, so the consumption decreased. The average price of oil was $20 per barrel in 1997 and $14 in 1998 when the currency crisis knocked the Korean economy down, while consumption was 750 million barrels in 1997 and 670 million barrels in 1998. These facts do not mean that the consumption decreased because the price dropped. The consumption declined first, so the price dropped. In this way, it is the most important for us to grasp what a variable takes the lead in price fluctuation. If the demand increase or the supply decline leads, the price will go up. If the price increase leads, the demand will decrease and the supply will increase.
It is strange that the mainstream economics does not allow even the simple interpretation on the simple price fluctuation so far as above. Indeed, when we look at various statistical indicators of demand and supply, we can not see whether demand leads supply or supply leads demand. Economics has been trapped in a static balance theory for such a long time. It is not too late now. Statistical indicators should be published separately in terms of demand and supply. In addition, statistical indicators should be obvious to show the correlation between interrelated variables. Whether the price led the supply and demand or whether the supply and demand led the price should appear in the economic indicators. At the present time, we can only guess the trend of demand and supply through the increase or decrease in inventories. But this inventory is also bi-directional. For example, when demand increases it is normal that inventory should be reduced, but there are times when inventories increase. If the economy continues to bounce, shopkeepers would accumulate more inventory for more sales.