Of Supply and DemandPosted: March 28, 2014
When traveling abroad, one often finds that everyday items are really luxuries. The laws of supply and demand are universal, and it is amazing how much money people will spend on something that they would usually take for granted. Among other staggering valuations, I have seen substantial price-tags on peanut butter, asparagus, and cheese. Not even fancy French cheese, stuff that was a few steps above “American Singles“. A very common response to those prices is, “that’s way more than that product is worth!” But does that statement have any meaning?
The problem that people so often have is that they get the idea that the commonly accepted price is the real value of something. “San Miguel can be had for pennies in Manila, so it is not worth $5 here.” That sort of thinking is simply not sound. Items don’t have a set value. The value of anything is determined by supply and demand, and since supply and demand constantly vary, values constantly vary. If San Miguel costs more in one place than in another, it is because the markets support different costs.
An important thing to remember as the consumer is that your willingness to pay (along with the willingness of everybody else) is the demand. If you think something is too expensive, you are right. But if you complain that something is too expensive and you still buy it, it wasn’t really too expensive, was it? On a clear day, I may tell you that Mickey’s Fine Malt Liquor is not worth buying at any price. Yet, in a moment of weakness, I may actually make the same purchase that I’ve regretted again and again. At the time of purchase, though, I clearly think that the beer is worth more than the money I am giving up. Otherwise, the sale would never happen.
To be sure, in retrospect we often feel ripped off. For example, if I knew how awful that Brazilian beer was, I would never have paid so much for it. But what I am talking about here is the asking price for a known good. Now I think that Brazilian beer really is too expensive, but only too expensive for me. For anybody who happens to actually like it and is willing to buy it at that price, it is worth every penny. All transactions in a market economy happen because both the buyer and the seller think that they are getting the better end of the deal.
Beer of the Week: Bass Ale – Bass was once a go-to beer for me. It is a pretty amber beer with a good malt body and a very comforting flavor. However, this batch was brewed in New York and it is not what I remember or expect from Bass. Compared to my memory, this American version is sweeter. It also has a hint of sourness from the grains, like sourdough bread. It may still be above average for large-batch American beer, but I am disappointed.
Reading for the Week: Three Men in a Boat (To Say Nothing of the Dog) by Jerome K. Jerome – Simply because Jerome could not get any mustard, he was suddenly willing to trade everything he had and more for a single spoonful. He had witnessed this supply and demand problem before: “I heard a man, going up a mountain in Switzerland, once say he would give worlds for a glass of beer, and, when he came to a little shanty where they kept it, he kicked up a most fearful row because they charged him five francs for a bottle of Bass.”
Question for the Week: In a way, Three Men in a Boat is really about conspicuous consumption: a group of friends go on a boating holiday with the (unstated and probably subconscious) intention to display their affluence and social standing by engaging in costly leisure. At what point do things become more desirable because of the apparent disconnect between their price and their “real” value? Are larger natural diamonds actually worth more because they have fewer practical applications?