Prices, Controls, Market Demand, Market Supply, and Dumb Luck

demand-supply-curve

While riding the streetcar in Portland recently I started thinking, what exactly makes an economy move in a particular direction?  How does an economy end up building or creating a particular product, a particular service, or even end up failing a great product or service?

The first and quickest to derive answer is that the economy produces whatever the participants demand of it.  But that is only part of the answer.  There are many others that lie just below this primary reason.  We all know really, the demand is met with some type of supply, and that this leads to particular prices, valuations, etc.  After all there has to be some type of demand for anyone to even create or produce a supply right?

Well, his is true, in an unregulated, liberty oriented, individualist economic system.  But those don’t particularly exist.  Everywhere there are controls, regulations, limits, forced pricing, arbitrary taxation, and other such things that alter supply, curb or encourage demand, usually with veiled threats of force.

To take a total view of the approach one must also count these forced alterations of an economic system along with the obvious supply and demand that works to meet the economic system participants’ desires and needs.

Take for instance two things that provide a service for consumers.  One provides it via market rate at $6.00 per hour and has no regulatory approach to it, and no post taxation or sales tax incurred during purchase.  The other is $4.00 but incurs a sales tax of 6%, a post taxation (not particularly paid by the individual, but by society and the general funds) of 6% per year after purchase and also has a regulatory rule attached to it that negates the use of the service after 3 years, unless one pays a 10% fee per year to continue usage.

One might think, well with all those strings attached who would get that $4.00 item?  Why not just spend the extra money and get use of it forever, no strings attached?  Well people tend to be fickle.  For instance Government often (and I do mean often) attaches very similar rules, taxes, and regulations to items we buy all the time, but we all still buy them because of the immediate “deal”.  Sales people are out there to sell you both, but the best way to encourage sales of a particular item is to provide and advertise the lowest price.

So let’s do a quick total and see what service really is the lowest price.  Take Item A for $6.00.  Let’s just say item A and item B both last for 10 years.  Let’s say we need the service for 20 years.  So at the end of 20 years Item A incurs $12.00 total.

Item B is $4.00 + an immediate sales tax of 6%.  That gives us a total of $4.24.  We then pay 25, 27, and 29 cents respectively the following years.  This puts our total at $5.05.  Let’s say we’re going with the 3 year plan and cease usage at the end of 3 years.  We buy another service Item B for $4.24, and end up, but the end of the next 3 years paying another $5.05.  At this rate, every three years spending $5.05, at the end of 20, we’ll have spent $30.30 with 2 years that we haven’t covered with service.  At that point we’d still need another $5.05, giving us a grand total of $35.35.

Even Item B with the extended plan, per the Figure below, is more expensive after a period of time.

Year Cost
1 $4.00
w/ Tax $4.24
2 $4.49
3 $4.76
4 $5.05
5 $5.55
6 $6.11
7 $6.72
8 $7.39
9 $8.13
10 $8.95
11 $9.84
12 $10.82
13 $11.91
14 $13.10
15 $14.41
16 $15.85
17 $17.43
18 $19.18
19 $21.09
20 $23.20

This provides an arbitrary, yet accurate analogy to laissez faire market efficiency in pricing compared to manipulatively controlled markets.  In the United States most don’t even realize how many prices are artificially reduced, yet we end up paying vastly more on the whole of things.  The automobile, air travel, roads, electricity, TV, cell phones, telephones, and many other things are either priced above or below, but often times cost us far more than we realize since the costs aren’t always realized at time of purchase.  Most of these things are setup or controlled by a market controlled and often manipulated for political notions by Governmental means.

The two things I’ve mentioned thus far are major contributors, in order of mention, in effecting the price, demand, and supply of a particular item to the people of the market place.  I strongly think, with the information I have, the third greatest factor, far less important than the other two but still a large factor, is pure, simple, dumb luck – or lack there of!

So the next time one is buying something at the store, think how much you’re really paying for that item.  How much is hidden from you?  How much have you truly been manipulated, not including those advertisements you see, to buy the particular item or service you are about to?

So in the end, the prices vary from $23.20, $35.35, and the low price of $12.00.  One can see the differences in the financial tools outlined, and how some people would obviously pay more for something than they really should be.  This is very common among cars, Government Services, and almost anything where the cost is pushed off extensively (more than a year or two).

At a later time I’ll elaborate on how price controls force fluctuations and excessive inflation on the price of items in the market.