Great post. The intuition for the effect on the mark-up is stark. In this model, the only way price can increase in greater proportion than the marginal cost--increasing the mark-up--is if the firm's producing where marginal revenue is negative.
Second, increase in supply implies a decrease in rate of quantity supplied. Instead, a glut followed in many markets, which is in line with a ramp up in production to satisfy increased demand.
I've watched the Supply Side/Demand Side inflation debate since Krugman and Summers argued about it several years ago. Given that China has now been open for months and prices are still rising, let alone not decreasing, provides some firm evidence that it was demand all along.
Isn’t an implicit assumption in your write up that the market concentration (/market power) is held constant? In your graph, rising MC would indeed reduce markup assuming the firm always had market power and producing at Q*. But, if the firm was producing at perfect competition where Q=MC, and supply side pressures caused both MC to increase AND firms to drop out, couldn’t a firm then move from Q to Q* (or a higher Q than Q* as in your example) which would result in bother higher MC and a higher markup from no markup to some markup?
Thank you for this post. A local economist complained about corporate profits recently and I couldn't summarize how demand is really the logical driver of markups. Now I can reference this work!
Great post. The intuition for the effect on the mark-up is stark. In this model, the only way price can increase in greater proportion than the marginal cost--increasing the mark-up--is if the firm's producing where marginal revenue is negative.
Second, increase in supply implies a decrease in rate of quantity supplied. Instead, a glut followed in many markets, which is in line with a ramp up in production to satisfy increased demand.
I've watched the Supply Side/Demand Side inflation debate since Krugman and Summers argued about it several years ago. Given that China has now been open for months and prices are still rising, let alone not decreasing, provides some firm evidence that it was demand all along.
Isn’t an implicit assumption in your write up that the market concentration (/market power) is held constant? In your graph, rising MC would indeed reduce markup assuming the firm always had market power and producing at Q*. But, if the firm was producing at perfect competition where Q=MC, and supply side pressures caused both MC to increase AND firms to drop out, couldn’t a firm then move from Q to Q* (or a higher Q than Q* as in your example) which would result in bother higher MC and a higher markup from no markup to some markup?
Thank you for this post. A local economist complained about corporate profits recently and I couldn't summarize how demand is really the logical driver of markups. Now I can reference this work!