The Law of Supply and Demand as said in the 14th Century

"If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down."—Ibn Taymiyyah, 13^th-14^th-century Mamluk scholar

Here's how we show this principle in the 21st Century....

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Getting the Price of a Tart Cherry "Right"

I have always been taught that the price of a product depends on the supply and the demand for the product. That is to say if the supply of something is low and the demand is high then the producers can charge a higher price. Now I was also taught if the supply of something is low and the demand is high then established producers will increase the amount they are producing and new producers will enter into the market to provide more of the demanded item. After a period of time the supply will increase and the price to the consumer will fall. In economics we talk about a downward sloping demand curve and an upward sloping supply curve. This is the basis for most free-market economic theory.

This brings me to an interesting statement that I read today. Did you know that there is a Cherry Industry Administrative Board (CIAB)? And did you know that the CIAB is a creation of the USDA? And did you also know that the CIAB notes that its role is to make sure “the annual supply of tart cherries matches the demand for tart cherries”? Of course the CIAB enforces the amount of the annual supply with the force of the federal government.

Now I am not much of a cherry (tart or otherwise) eater but I am told that tart cherry are used for the production of 'cheery wine'. Anyone that wants to may grow tart cherries but if you want to sell your tart cherries you must have a permission slip from the CIAB. Much like high-school and your getting a hall pass.

What can I say? The federal government regulates the amount of “tart” cherries that may be marketed which controls the price of the product. If the federal government bureaucrats decide that the price is too high then they let the growers know they can sell a few more cherries or if they think the price is too low then the can reduce the amount of cherries allowed to be put on the market.

This is no skin off my nose because as I said before I don't like cherries or things made from cherries.

Isn't it good that the government is looking out for us by their knowing just how much demand there is going to be for this product and then acting on this future knowledge so that everything stays in balance? Of course if the CIAB did not exist then maybe folks would grow more tart cherries and/or new folks would get into the business of growing cherries and then the price to the consumer would reach its “true” level and everyone from producers to consumers, would know the real price of one tart cherry.

Jerry

P.S.

Just a quick note toremind you of the four basic elements of the Law of Supply and Demand (without government interference).

1. If demand increases (demand curve shifts to the right) and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.

2. If demand decreases (demand curve shifts to the left) and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.

3. If demand remains unchanged and supply increases (supply curve shifts to the right), a surplus occurs, leading to a lower equilibrium price.

4. If demand remains unchanged and supply decreases (supply curve shifts to the left), a shortage occurs, leading to a higher equilibrium price.



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Investors, Traders and Entrepreneurs. 

The business of writing

Writing books results in a few big winners but many more losers – especially with about 30,000 books self-published every month.

It is also a lesson in the Law of Supply and Demand.  I have priced my book Lucky and Good ( the ebook version) as high as $11.99 each and as low as $.99.  That is not quite right.  For five days every 90 days I have a chance to give my book away FREE.  (I make it up in volume.) 

This is an interesting experiment in pricing and more importantly the Law of Supply and Demand. I raised the price of my book recently from $9.99 to $11.99 to see how it might impact sales.  It worked – nobody bought it at the higher price. And then this last weekend, I used two out of my five free days via Amazon to give the darn thing away - 1,469 customers downloaded it.  Hooah!

Now if I could only sell 1,469 ebooks every two days at a price of $9.99 each, I would be sitting fat and happy (actually I already qualify for both).  But clearly I would be richer because my annual income would be: 1469 copies (per two days)/ two days * 365 days per year * $9.99 (retail price) * 35% (the author’s royalty on Amazon = $937,385 per year.  You gotta love it unless you live in California or New York City.

The problem is that I can’t sell as many at $9.99 as I can give away for free.

I never wrote this darn thing to make a living.  I wrote it because I had a few things to say and I ended up enjoying the process of creating it.  But the experience is  a reminder of the 13th/14th-century Mamluk scholar, Ibn Taymiyyah who first described  the Law of Supply and Demand (without using that label):  “If desire for goods increases while its availability decreases, its price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down."

If you have an idea or two about how I can get 700 plus downloads a day at $9.99 per copy, I’d love to hear them.

Thanks!

John

P.S. - The current price is $4.99.

The Law of Supply and Demand and Nike’s New “Red October” Air Yeezy II Sneakers.

On February 9, Nike announced via Twitter that it has a few of the new Air Yeezy 2 Red October sneakers.  They sold out in 11 minutes.

Nike’s goal is to make the most total profits – from all their shoes and products.  They initially create a shortage for this new design by releasing only a limited quantity. But this doesn’t move the needle on their Profit and Loss statement.  The demand for the new shoes hopefully then creates a buzz, plenty of publicity and the chance to sell the new sneakers by the truckload.

Nike does not benefit initially from the higher prices in the secondary market like eBay (where one capitalist tried to resell his pair at about $16 million), but the perceived shortage provides a media spotlight on the new shoe and plenty of free publicity. It also helps drive the demand for more shoes that Nike will sell later.

Nike’s goal is to make lots of money from the new shoe line and to do that they will have to sell many more shoes and their total gross profit will be (the number of shoes sold times (wholesales shoe price less the cost of production)).

But here’s the rub.  The more shoes they sell, the less scarcity.  In the long run you can’t have both scarcity and sell an infinite number of shoes.  In a free market, prices self-correct. 

John

The Law of Supply and Demand and Derek Jetter

In an effort at full disclosure I must tell you that I am not a big sports 'fan'. Yes I do play tennis as often as I can and I watch the tennis channel a few times a week when possible. I played baseball when I was much younger and then moved over to softball later in life (slow pitch and I don't want to hear any wise cracks). Now that I have disclosed that I will get on to the point of my post today.

I saw the Derek Jeter announcement that he will retire from the game after this season. Now what makes this of interest to me is that as soon as this was announced ticket prices climbed like mad. Before the Jeter announcement you could get a ticket to the season ending series in Boston for $26. About an hour after the announcement the ticket site did not have a ticket for less than $200 and as of the last price check the tickets were $1,153.01. Wish I had about 10 of those $26 tickets so I could resell them on-line. Yes, I would scalp for profit.

What does this tell us? Did Jeter's value as a player jump over $1000 per seat in just a few hours? I don't think he improved his game any in that hour or two. What this tells us is just basic economic theory. If there is fixed 'supply' of something [tickets to Jeter's last game] then the 'price' of that fixed something will go up as 'consumers demand' increases. Simple Supply and Demand.

Now if I announced that my last game of tennis would be next fall I don't think I could get any more for a ticket than I am getting now, which is zero dollars and no cents. More economic theory. If you produce something people want then they will demand that product and the seller can then demand a higher price. I hate to admit it but I don't think anyone is demanding to see me play tennis. But then again I could be wrong.

Jerry