Anyone who has taken economics knows a little about supply and demand. The graph of price equilibrium is quite clear. When demand equals supply, there is an “equilibrium price.”
I have wondered how that is very useful. I have always thought the economy was quite complicated and immune to single factor descriptions.
I doubt anyone could come up an equilibrium point for a basketball game and that is a lot simpler than the economy.
Still it might be useful.
Supply side economics is the idea that makes sense. I know it sounds crazy to many, but think it through. Supply encompasses all the ingredients of the product. The material, the machine time, the skilled labour, the unskilled labour, the transportation both in and out, the support staff in purchasing, training and supervision.
There is a lot going on before the first unit is available. By that look, supply must come before demand. That’s where the money to demand something comes from. You get money by trading your time, skills, and effort to earn it. You can an see how it works, remember how Henry Ford wanted to build product his workers could afford to buy.
Prices fall out of the meeting of producer and their customers.
The price will rise if the product is wanted by many, but there are few units available. Scarcity is fundamental in economics. People take the simple graph as gospel and assume if something is scarce it will be expensive. The left side of the graph.
That is not completely true. Scarcity only moves prices up when something is both scarce and desired by people. Demand is not increased much by scarcity. You could have the only one of something but until you find someone who wants it, how much is it worth?
If something is greatly desired as well as scarce, the only price limit is how much money the potential purchaser can come up with. I was once told that the book “Things I Cannot Afford to Buy” by Bill Gates, is 200 pages and every one of them is blank. I suppose if he and Elon Musk and Jeff Bezos had to have the only one of something, the price could be quite high.
So price becomes the result of mixing scarcity, desirability, and ability to pay.
I think Coco Chanel understood it perfectly.
“It may be true that the best things in life are free, but the second best things are very expensive.”
High prices can drive desirability. I heard of someone who put a workable refrigerator on the side of the road with a sign. “It works, It’s Free. Take it away.” it sat unmoved for days even though some people examined it. Experimenting, the homeowner changed the sign. “Good working refrigerator $50.00” Someone stole it within 3 hours.
If the price is too low, people think it is not as good.
Setting a price
Setting a price involves understanding all the variable and managing desirability through adverting and scarcity through deciding how much you should produce. Do you think people make expensive perfume a quarter ounce at a time? Not likely. I don’t know how they do it, but I would not be surprised if they made it 20 gallons at a time and then waited before starting another batch. Increasing volume could make less money because it would reduce scarcity. DeBeers has been controlling the availability of diamonds for decades.
Unique things are especially hard to price.
Between 1991 and 1998 the Chicago Bulls won the NBA championship six times. How much was Michael Jordan worth? The certainly right answer is “More!”
When the salary cap in 1996 was $24,000,000 for a player, could some other star argue he should get $24,000,000. The general manager would argue, “C.mon that’s as much as Jordan makes, and you’re only half as good.”
Would the reply “I know but he’s worth $50,000,000 so I should get 24.” carry any weight.
By using comparables, pricing a unique skill or object is impossible. There are many variables.
Never compare to a single example of something rare.
Understand how prices form. It doesn’t always make sense until you can see the inputs, the desirability, the purchasing power of the customers, how scarcity is managed.
If scarcity is accidental, prices will rise and go back down when the supply returns to normal.
Supply side leads because there is no purchasing power until goods and services have been supplied. Even if the government gives money away, they had to get it somewhere. Taxes maybe. Ability to borrow. Again supply leads
Economics is about the allocation of scarce resources. It is just common sense once you unpaint the complicated picture.
Be sure your career is based around things people want to buy. Desirability is a big part of demand.
Know why some things are desirable for you and see if they really deserve the price.
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