21 July 2012

Day 49: Resource Distribution: Supply & Demand

As seen in ‘Day 40: What is Economics?’, economics essentially deals with three questions: what should be produced, how should it be produced, who gets to consume what is produced.

Within Supply and Demand – we’ll be looking at how our current economic system decided to answer some of these questions.

Not all wants and needs are considered to be demands in the world of economy. Your need or want will only be interpreted as an actual demand once you have the purchasing power to acquire the goods and services to satisfy your particular want or need.

This practically implies that you can ‘want’ and ‘need’ all you want – if you do not have the financial means to acquire these resources, then you will not get them. This is obviously very problematic and a very well – stupid – way to set up an economic system. It does in no way whatsoever consider everyone but only those who have money. If everyone at some point had been given an equal amount of money – it might have worked out for a little while, but even that never happened. So the decision to work with demand in terms of wanting/needing something and having the money to back up this want/need – is very deliberate, since we’ve never at any point in history have been ‘equal’ in terms of purchasing power and so the decision to only consider/distribute towards those who have money, implies a very specific preference of people with money over people with no money. Problem!

So currently, the economic system is set up to provide only to those with Money – and so within an Equal Money System, to be able to provide for all – we’ll simply provide everyone with money so EVERYONE can be included and be ‘represented’ within the system through having money available.

The interaction and relationship between supply and demand illustrates how prices are determined and is one of the most fundamental concepts to the free market economy.

As mentioned in previous posts, resources such as goods and services are scarce. They are available in limited quantities only. By setting a price on goods and services you are ‘scaling down’ the scope of people who can afford or demand the good or service.

Prices are determined by looking both at how much people are willing to pay for a particular good and how much suppliers are willing to supply at any given price – and so as these two come together and cross – a price has been determined (this will become clearer later).

The amount of people who are able to purchase the product is thus controlled through the price.
For instance, everyone might want bread to eat – but suppliers are not interested in supplying everyone with bread for free because that would not make them any money, and so instead of producing a lot of bread, a limited amount is produced which is not enough for everyone – and so people start “competing” to get themselves a loaf of bread, which is done basically as a form of ‘bidding’ and so for instance the price will be set at $1 a loaf – and all the people who do not have this money are then ‘eliminated’ from the equation and now only those with money will be able to get bread. And so the illusion is created that everyone who wants bread gets bread and everyone is happy – while it is only this way because everyone who did not have the means to get the bread has been eliminated through the principle of ‘demand’.

This is how the forces of supply and demand attempt to come to a point of equilibrium. This equilibrium price per unit comes about where the quantity demanded by consumers will equal the quantity supplied by producers (more on this later).

The Law of Demand states that:  with all other factors remaining equal – the higher the price of a good, the fewer people will demand that particular good. In other words: when the price goes up, the demand goes down. The ‘reasoning’ behind this, is that humans are compelled to want to obtain everything as cheap as possible – this is considered to be in their best interest.

Let us illustrate the Law of Demand with the use of a graph:

In the above graph, A, B and C are point on the demand curve (D). At point A (highest price), a certain amount Q1 is demanded (lowest quantity). As the dot moves from A to point B, to point C: the price decreases, and the quantity demanded increases.

The Law of Supply states that: as the price of a good or service increases, the quantity produced and supplied will increase. The logic applied here is that a producer will increase his production and supply of a good or service when prices increase, because the producer wants to use this as an opportunity to obtain greater revenue.

 As you can see in the above chart, the quantity supplied will increase as price increases. Both the person who demand and the person supplying are following their own self-interest – which as an effect has them going in opposite directions: As prices rise, demand will become less but supply will become more – there is a constant polarity pull in play.

(Note that these quantities are always in relation to a particular time frame, where a particular amount is demanded per day / week / month / year , etc.)

There is always a certain time-lapse present between a change in demand and a change in supply. This sometimes causes unfortunate outcomes. If one year for instance, the demand for a particular product such as ‘cooling fans’ has been fairly low due to unusual cold weather circumstances – the supplier might feel the need to respond to this decrease in demand by decreasing fan production – because he is not getting all of his stock sold. If in the next couple of months a sudden heat wave occurs then the demand will change instantly but there will be a shortage of fans until the supplier has had the time to respond to this change in demand. This dynamic of producing more and less in relation to demand can sometimes we quite problematic when we are dealing with for instance crops. Crops are seasonal, sometimes annual and thus the time-lapses taking place are greater in proportion. If the farmer notes a particular demand for corn at point X in time, he will plant and plan according to that demand. But by the time his crop is ready for harvesting, the demand will already have changed overtime and his current obtained supply will no longer match the new current demand. If this happens on a big scale, the consequences grow in the same proportion (and if this crop is all you’ve got – which is a situation many poor famers currently find themselves in – and if you don’t get your crop sold because of a change in demand, and had put everything into this crop = then you’re in big shit).

If we now combine both the supply and the demand curve into one graph, we can indicate where the point of ‘equilibrium’ would be:

Where the supply and demand curve meet, is the point of equilibrium. In this instance it is represented by point B through which both curves cross.

In theory, the price for the particular good concerning would thus be set at the price P2 with a quantity supplied of Q2.

The same way as prices are calculated for products, wages and salaries are calculated for jobs. Their ‘value’ is equated in terms of scarcity and availability.

Note though that this is only a ‘perfect theoretical model’ and that in reality a lot more factors influence the determination of prices. Even though reality will not follow this exact scheme, it gives you an idea of what type of ‘reasoning’ the economic world follows – which will assist in the future understanding of discussions pertaining economic issues.

Note: The economic world acknowledges that this is a somewhat unfair and flawed system - and that not everyone having equal access to all resources is just an “inconvenient fact of life”. The current system is justified by claiming that we would be worse off with any other alternative. This is true to a certain extent, as there is no solution or improvement possible within the framework of the system itself (which will become clearer as we progress through the various blogs). That is why the Equal Money System is not just a re-alignment of our current monetary and economic system – but a complete and total replacement. -- it will thus not be governed by the same rules and forces as our current system. We have been so conditioned to think “inside the box” that it is hard to fathom and envision an Equal Money System. We easily make the mistake of relating Equal Money concepts back to what we already know as the current system we live in (= “the box”). This ‘drawback’ influences how we perceive and interpret the concepts we hear or read about as we are placing them in an incorrect context. It is thus important to ‘step back’ for a moment when processing information on the Equal Money System and allow yourself to fully grasp what is actually said and not what you *think* is being said.

Excess Supply [price is too high]

If the price of a product is set too high there will be an excess of supply for that particular good or service – and the price setting will be labelled as ‘inefficient’.

Producers want to produce a lot of a good or service in the hope to increase their profits – while the consumer will find the product or service less and less appealing and will purchase it in lesser quantities because the price is seen as too high. Eventually the supplier will be forced to lower his price in an attempt to sell all of his product or services. When the price is lowered to a point where all products and services are consumed – equilibrium is reached. The market is perceived as saturated. Any price above the equilibrium price will leave an excess of supply.

Excess Demand
[price is too low]

If the price of a good or service is set below the equilibrium level – an excess of demand will be created. There is a greater quantity demanded of the particular good or service than there is available. When this happens, the price of the good or service will be increased until equilibrium is reached – to lower the level of competition.

This whole Supply and Demand model just re-emphasizes how we are allowing conflicting self-interest to rule the world – instead of aligning our separate individual self-interests to One interest as what is Best for All Life – and within that eliminate the need for all these various models and interaction models to tell us what to do according within the respect and honour of everyone’s separate little mind reality bubble and within that not provide basic necessities for everyone.

The next point to be discussed (after Self Forgiveness and Commitment Statements) will be how the government will try and intervene to make things more equitable and how it works out just the opposite.

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