September 27, 1991

More on Supply and Demand

The buyer buys for as little as possible; the seller sells for as much as possible.

Legal Maxim

In a previous essay on a Market Economy, I snickered at the Law of Supply and Demand. Actually, it's not all baloney.

One part of the law that is always true is that if someone has a product for sale and no one wants to buy it, he will not be able to sell it. That should be obvious.

What isn't obvious are the reasons why a product cannot be sold. Let us assume that the product is a useful product and that it is well constructed. If no one knows about it, it won't sell. If few can afford to buy it, it won't sell. If all that someone is willing to pay for it is what it cost the manufacturer to make it, his business will go belly up.

A lousy product that is over priced, and even dangerous, will sell if the buyer can be convinced that he needs it and can afford it. A case in point is the cigarette, which is smoked by more poor than rich people. Of course, there are more poor than rich people.

I am not writing this column for the business man. He already knows what I'm saying or he is out of business. I am writing it for people who don't understand why someone dares to have such a large mark-up on his goods. It's a complicated business, business is!

I can buy whole wheat berries for about 30 cents a pound retail. I imagine that the farmer gets less than a nickel a pound for them. That same pound of wheat, shredded up and molded into squares, baked and packaged as Shredded Wheat sells for over $3 a pound.

A person who doesn't count his time as worth anything can take a pound of wheat and make a nutritious and tasty loaf of bread for about 50 cents, not counting the fuel to provide the heat to bake it.

Am I saying that Shredded Wheat is worth what you pay for it? No; all that I'm saying is that the packaging is worth more than the ingredients, as is the cost of the advertising to get people to buy it. Nutritionally, it's a better buy than most products which don't even have the wheat. Compared to a soft drink, which has no food value whatever, it's a great buy. Compared to a pound of beans or rolled oats, it's not a very good buy. Could the manufacturer, distributor and retailer sell it for less and still make a reasonable profit? Probably! The Law of Supply and Demand has a lot of margin and it usually favors the seller. I once heard the manager of a large motel chain say that they would break even at about 20% occupancy. Who gets the rest? Can you guess? If he is as greedy as he was when he built his first motel, he will use it to build more motels to make more money to build more motels.

The economy will continue to grow, unless the businessman takes his profits, buys gold and stashes it away. Then everything will collapse. People will be out of work and, since there are more people now, we would have a more humongous depression than in the thirties.

Am I saying that unbridled greed is what fuels a prosperous economy? That's exactly what I'm saying. If everyone was like me and content with his lot (mine is 22 acres), the world economy would collapse. On second thought, there wouldn't be any world economy to collapse --it never would have happened.

If you don't like the way that things are, it might be possible to get a hunk of land that no one else wants, from the government, and live on it. You may also die on it and be buried in it. An alternative, which I prefer, is to take what the system has to offer and enjoy it. It's a lot better than what my parents and their parents had, and very much better than it was a few hundred years ago.

The status quo won't last forever, but it will probably outlast me.

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