Supply and Demand right? Easy enough. The more that people want to buy a thing the more the sellers can hold out and find people willing to pay the higher prices. Inversely the more of something there is to be had, the better chance the buyers have of shopping around for the more desperate sellers, forcing all sellers to lower their price to compete. Simple high school level economics.
Before I get too far into this lecture I should put up a disclaimer. I have never “studied” economics. I have an intelligent and curious mind, and I follow freakonomics and planet money, and I try and make sense of the world in my own terms.
But wait a second. Demand is flexible. That means that If you lower the price, more people will be willing to buy it at the lower price point. Every new product is hunting for the right price point. If you lower the price and make less profit per unit, but sell more units do you make more money? Sometimes you do, and sometimes you don’t, but my point here is that a second ago we said that price depends on demand, and now we see that demand also depends on price.
Supply can be distorted through monopoly control or through an agreement to limit production or coordinated purchasing policies.
- diamond mines
- International manipulation of grain markets
- Patent control / copywrite law
So we have supply, demand, price-demand feedback, supply manipulation. But all this only applies to commodities. Products and services differ from one another, where as commodities are interchangeable regardless of the source. No one can tell whether a gallon of gas came from Texas, or Canada, or Iran. And in a free market no one cares. However you can tell whether your mp3 player is an ipod or sony. You can tell the difference between Kraft cheese and macaroni and the store brand. So there’s another set of things effecting demand:
- The differences between similar products.
- The reputations of the companies.
- The effectiveness of their advertising.
- The ease of change once you’ve started using a product.
Earlier we looked as Price-Demand feedback. There’s a similar thing that happens on the seller side. A sort of Profit-Supply feedback. That is to say that if a product’s supply/demand situation has positioned itself so that a product has higher profit margins, this will draw more manufacturers into the market to compete. This will increase supply and therefore lower price. This is where price is really determined over the long term; Average Profit Margins.