Saturday, May 5, 2012

Difference between Supply & Demand and N Theory

Definitions of Economic Theories

Common economic models begin with Supply and Demand Theory. Although there are many other so called theories, the fact is most return to Supply and Demand as the starting point. For instance "Marginalism" is just the last Supply and Demand event. "Budget Constraints" are factors affecting the Supply curve. "Aggregate" theories are simply summary Supply and Demand curves. Then there are the reason consumers select a certain level of Demand. These theories include "Rational Choice," "Utility" and "Opportunity Cost" theories of consumer behavior. Their choice is still made within the confines of the Supply and Demand model. Their choice lacks meaning unless interpreted within the S & D model.

Although N Theory, Negotiation Theory, is based on a repudiation of the Supply and Demand model as the primary economic model the reasons may not be apparent. Let's contrast the two and see if the differences can be made more apparent. First, initial product pricing is set by the Seller in the S & D model. In N Theory no price is set until a transaction is consummated by a Buyer and Seller. So N Theory states "price" is set by a negotiation between a Buyer and Seller. Both participants are given equal weight in the price setting process.

The S & D model states prices changes when the quantity offerred or demanded changes. The N Theory model disregards the "quantity" theory of the S & D model and states prices change when Buyers and Sellers alter their settlement point. N theory states the reson might be the quantity offerred, but it also might be an irrational reason, or an online astrology prediction or the result of an indepth analysis of the market. The reason is not judged as important as the fact the actors changed the direction of the market. In N Theory the movement of the market is the event to be evaluated since it likely foretells future movement.

The S & D model assumes top-down control. The Seller sets the market price and enters or leaves the market to influence the direction of prices. N Theory says future sales are subject to the influence of the millions of consumers and perceptions about the overall economy. N Theory is a bottom-up economic theory. The consumer can influence the Seller to adjust her prices. N Theory is the opposite of S & D Theory.

The way in which S & D  and N Theory operate determine the main market factors that influence each theory. For S & D Theory it is the "quantities" of products brought to market. For N Theory it is the perception of the overall economy and the economic position of the Buyers and Sellers in that economy. If a Buyer believes the market for her product will grow, she is unlikely to compromise on price to try to induce a sale, but if the Seller preceives the market is degrading she might make substantial concessions to induce a sale.

This is why S & D Theory based models performed so poorly in the Global Economic Crisis of 2008 and why a consumer based theory like N Theory could foretell an impending economic collapse. Buyers and Sellers are going to begin to change their attitudes before they change their actions. An economic theory that surveys the market actors is much more likely to foresee the direction of the market before the change is reflected in the products brought to market.

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