The Myth of Supply and Demand Part 2

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In the first installment of this-two part article, I commented that the high cost of HiFi has been a popular subject for audiophile conversation since at least the 1960s, when the Marantz and Sequerra FM tuners amazed people with both their performance and their - for the time - stratospheric pricing.

AR-supply3b.jpgCarrying that same theme into the present by referring to the half-million dollar price tag for the current "25th Anniversary Edition" of the Goldmund Apologue speaker system, I said that one of the more common responses to products like those was for people to wonder how they could possibly cost enough to build to justify the kinds of prices their manufacturers asked for them, and I went on to show that, except to determine whether any more of a particular product will ever be built, what a product costs to build has nothing at all to do with what its real-world selling-price will be.

The true value of any good, I explained, is its value in exchange, and that value is determined ONLY by what a willing buyer is willing to pay for it and a willing seller is willing to take in payment.

Statements like that usually draw (if not agreement) just two kinds of responses: Either absolute rejection, based on either "intrinsic", or "sentimental", "moral", "emotional" or "other" values (take your pick as to what you want to call them) or ― going the other direction entirely ― a wise nod and some platitude about "supply and demand".

AR-supply5a.jpgIn fact, neither of those would be correct, although the "supply and demand" position does come closer. The truth is that there are actually THREE elements to price determination: Supply, Demand, and, fully as important as either of the others but almost never mentioned in ordinary conversation: The Availability of Substitutes.

Here's the proof: Let's suppose that, just as the Hunt Brothers were able, more than thirty years ago, to "corner" the silver market, YOU have been able, not just to corner the market, but to establish an absolute MONOPOLY in steel. You now own ALL of the steel in the world, and no one can buy any of it from any other source anywhere on the planet. Pretty neat, huh? No matter HOW rich you were before, now you're going to be able to make Bill Gates, Warren Buffet, and Carlos Slim look like pikers! After all, steel is the basic raw material for a HUGE range of products and, now that you have absolute control of it, you can charge whatever you want and people will have no choice but to pay!

Does that sound reasonable? Let's see: (using obviously simplified numbers just to make the example easier to understand)

Let's suppose that before your takeover, steel was selling for $3 per ton and 100,000 tons of steel were sold on the world market every day, for a total transaction value of $300,000 per day. What do you think the total daily transaction value would be if, given your total monopoly, you were to raise the price of steel from $3 to $300 per ton? Would you immediately make 100 times more money ($30,000,000 in daily sales) and truly put yourself in position to become the richest person of all time?

Probably not.

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