Wednesday, January 15, 2014

Supply and Demand

I managed to dodge courses in economics during my sojourn as a student, all the way through college graduation. The closest I came to this subject, which few have apparently mastered in the real world, was helping my teenage daughter with Economics 101. It was almost mind-boggling.

One concept that defies my peculiar sense of logic is "supply and demand," the economic drivetrain that sets prices based on the scarcity or abundance of a desired thingy. In other words, the more rare the item is, the higher the cost. When something is commonly available, it loses its luster and the price point plummets.
For example, the world is awash in diamonds. But De Beers, the world’s leading diamond company that has dominated the exploration, mining and marketing of diamonds since the late 19th century, decided to parcel them out little by little - thereby creating a perception that diamonds are rare and must therefore cost more money. In truth, if all the diamonds available were to flood the world market, they might end up as cheap as a cubic zirconia. And cubic zirconia would then be as cheap as dirt.

But here's the logic of the world according to me. If there is very little of something, it is criminal (or capitalistic) to charge more. For example, in a war torn country where a loaf of nice bread might be hard to come by, why charge some poor schmuck twenty times the cost if he comes upon the rare loaf? Why punish his pocketbook as well as his stomach?

If all the original Jerry Garcia Beanie Babies sold out for $10 when they were released onto the market, why ten years later will someone have to pay $500 for one, just because they are harder to find? Makes no sense to me. Value becomes a matter of pure perception, and the spoils of perception fall to the hands of the greedy who manage to control the supply.

Go ahead, sophisticated economists, tell me why this notion sounds like the ranting of a buffoon. So to be absolutely technical, here is how Wikepedia (the source of all knowledge true or false) explains supply and demand:
  1. If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
  2. If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
  3. If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
  4. If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.
The way I read this, the world runs on a perception of how goods should be distributed, and the rise and fall of prices is purely profit driven. As they say on Wall Street, "The rich shall inherit the earth."

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