Wednesday, January 23, 2013
Market driven economy
Because of this, the shouts of price gouging can be heard everywhere. "Those greedy fuckers are trying to rip me off!" says the sheep, who has no understanding of economics, yet believes what he's told by his 'masters'. We've been conditioned to think that when the price of a product goes up dramatically like now, it's because people are greedy. And I will concede there's definitely some of that, but the greater forces at work are the market responding to demand.
Unless you live in a hollow, removed from society, you've probably heard the phrase "supply & demand". See below:
Why does this affect price? Greedy business person is just trying to rip me off!
Actually, you're to blame. I walk into a store and say "I want to buy that Pepsi for $.50." It's the only one. You want that Pepsi more than I do. You offer them $.60. I come back with $.65. You say $.70. I give up the fight. Does the store sell you the Pepsi for the original $.50 that the store was offering it at? No. You offered them $.70 so they'll take it. You affected the price of it because the supply was low and you felt that the Pepsi was worth $.70. I didn't, so I walked away. This allows the product to remain on the market, but then it's up to the consumers to determine what they value more; that product whose price is higher because of more demand or something else.
Now here's the funny thing. Unless affected by government (it's all affected by government, but...), these higher prices will open up the market for more competition because other people will see a benefit in offering their comparable products. This should increase supply and this should bring the price down. Demand could increase more because there's now more supply, so more people enter the market, but that should also increase the suppliers. While in theory, you can reach a level of market saturation, where the amount of suppliers can't increase anymore and demand doesn't recede, but the chances of that are small. External factors (like government) are usually to blame for that; why aren't more and more gun manufacturers coming to market, for example.
If the price is artificially kept low, whether by government or by the businesses themselves, there are a couple outcomes.
1) Limited supply - Because the price is lower, you'll buy a crap load of them when you don't need them, making them unavailable to others. During Hurricane Katrina, there were people buying shelf-loads of flashlights, multiple generators, 500 rolls of toilet paper. Why? Because the government implemented "price controls" to keep them lower than the market demanded, people bought more than they needed right now. AND, it kept new producers from entering the market or the current producers from adding to the market because they didn't see any value in it. There were people in surrounding states that had generators and supplies to sell. They didn't bring them to Mississippi or Louisiana because they were told "You have to sell them at the same price they were at before the hurricane." Why am I going to drive hundreds of miles out of my way to sell a product at the same price I bought it at? If I can't make a profit on it, fuck that.
2) Rationing - Again, by government or the business, they restrict your access to supply. Not by market, but by 'force'. "You can only buy 2 of those." "Limit 1 per customer." There's a gun shop nearby and they're my go-to shop for my gun purchases. Prices are usually low, stock is usually high, staff is knowledgeable and the owners are just good people. They have limited the ability of people to purchase products (limit 1 per customer) because they want to keep the price low. On their Facebook page, people are praising them for not 'price gouging' like the other stores in the area, but they've corrupted the market by denying your access to the product. The stock is still gone in minutes, it just means more people are going there for it. How many people ran out and bought AR's, AK's, pistols, ammo, etc... who generally didn't buy them before?
When the price goes up, a vendor who believes in the market will take the "extra" profit, reach back to their distributors and try to get more stock. Or they'll search for new distributors to find new sources for that product. They'll now have the money to go down those new avenues that may have been restricted to them before. After the first coronation of King Barry I, the prices of ammo shot up. But, within a couple months, the market became saturated because new manufacturers came to town, vendors now had access to overseas makers, and the price settled back down.
As long as the Corky's in Congress don't forget to wipe their asses and remember they're 'heads are on the chopping block', the market should settle back down, the availability of products will increase and the prices will drop.
Thanks to Wirecutter for getting my head thinking about this.