Explain Supply and Demand

[Riverwolf]

I honestly don't understand.
If demand for a commodity outstrips it's supply...
Why does the price go up?
Why not just the inventory goes low?
Sounds like simple greed to me.

[J Patrick]

Originally Posted by Riverwolf

I honestly don't understand.
If demand for a commodity outstrips it's supply...
Why does the price go up?
Why not just the inventory goes low?
Sounds like simple greed to me.

.....simple greed may be the most simple explanation but there is more to consider....if inventory is low than sales volume can dip...a retailer might be justified in charging more to remain in business...especially if there are employees to consider...

....individual sellers are pretty much always going to try and get market value for an item....sometimes one sells for less because of supply and demand....would that be the opposite of greed...generosity??.....supply and demand works both ways...

[robj144]

I'm not an economist, but you need to remember that economics is a man made device and part of its dynamics relies on psychology. It's supply and demand with popularity (or necessity too).

Price exists at whatever equilibrium people are willing to pay. Your Martin may techincally be worth $3000, but if no one pays that, it's not worth $3000. Keeping with Martin, if you have a rare Martin (low supply), that many want (high demand of a popular item) the richest will outbid others to aquire your Martin and the price will increase.

That's my lamens take on it.

[steveh]

There’s one guitar; we both want it.
I’m gonna pay more than you to make sure I get it.
End of.

Cheers,
Steve

[fazool]

Its a very predictable cause-and-effect.

If an item is running low and there are more buyers, they essentially get into a bidding war. If a buyer realizes there aren't enough items to go around, they offer more money for the item.

This happens every single time. So if a store has 100 items and 100 buyers, they will sell and everything will even out. If they only have 50 items but 500 buyers, they can safely raise prices and even if 90% of the people are turned away by the price increase, they sell for the higher price.

[blue]

Pretty simple.

There are lots of modern Fender Squiers, and only a few people really really want them.

There are few 59 Les Pauls, and lots of people really really want them...

Not hard to understand why one would cost more than the other.

[Dru Edwards]

Originally Posted by blue

Pretty simple.

There are lots of modern Fender Squiers, and only a few people really really want them.

There are few 59 Les Pauls, and lots of people really really want them...

Not hard to understand why one would cost more than the other.

The vintage Les Pauls were the first thing I thought of.

Riverwolf, it's a balancing act. As an example, the increase in demand for lumber has increased over the past year and supply can't keep up, so prices climb. As the price climbs, some of the demand decreases until there's an equilibrium. If the price goes too high then demand goes down to a point that there's an excess in supply. When that happens, another correction is required to reach equilibrium.

[rokdog49]

Most of these explanations, while valid, really don’t answer your question fully.

If a commodity is in high demand and sells out, the exhausted inventory creates a void.
That void cannot be filled until the inventory is replenished. The seller is at the mercy of whoever supplies the commodity. Now this is where things can get tricky.
During the Oil Embargo of the eighties, anything manufactured with petroleum or petroleum by-products, went through the roof price-wise because the raw material supplier (oil company) could not get sufficient crude to refine.
They simply were forced to charge more or they would have suffered huge losses.
The theory is, higher prices=reduced consumption. Guess what, some people had to stop buying stuff made of oil.
Today, we have a surplus of oil and the oil companies have to compete with each other to sell their refined product. That drives the commodity...”crude oil” down. There is too much and only so much can be stored so it has to be gotten rid of.
Production is cut back accordingly to accommodate the lack of demand and still make a profit. Right now, we have excesses with certain commodities and shortages of others. The micro chip shortage issue is huge.
Checked the price of used cars in particular lately?
New cars are up in price and some models aren’t even available.
Supply and demand.

[Riverwolf]

Originally Posted by Dru Edwards

Riverwolf, it's a balancing act. As an example, the increase in demand for lumber has increased over the past year and supply can't keep up, so prices climb.

This is a great example but not a good answer except for greed.
A 2x4 is still a 2x4.
Is raising prices seen as better than empty shelves?

[robj144]

Originally Posted by Riverwolf

This is a great example but not a good answer except for greed.
A 2x4 is still a 2x4.
Is raising prices seen as better than empty shelves?

There are costs somewhere though. If you want to increase the supply of lumber, the overhead needs to increase as well which makes the whole supply chain prices increase. It's not just greed.

[buddyhu]

Originally Posted by Riverwolf

This is a great example but not a good answer except for greed.
A 2x4 is still a 2x4.
Is raising prices seen as better than empty shelves?

If the original seller sells out at a low price, at least some of the folks who have purchased at this low price will re-sell at a higher price and realize a profit. So original seller may decide that it makes sense simply to increase their sales price.

I’m sure greed is in the picture at least some portion of the time . But there are other psychological factors at play. Certainly fear is one. If you need to keep bringing in income to feed your family, and you see a shortage that may leave without anything to sell, you may want to raise your price on the stock you have because you fear that you may have nothing to sell for a while, and hence no income.

A seller may have also sold product for a loss (milk and wine are examples) during times of surplus (which drives prices down because some of your competitors need to get some cash flowing into their account), and may see the times of tight supply as the time to balance out those losses (so that, on average, you make what you consider to be a fair profit).

[Riverwolf]

OK, I think I have a clearer picture. Not that I like it.

If I had a store that sold 500 2x4's a week.
Now I can only get 250.
But my operating budget relies on the income of 500.
If I double the price, I don't really make more money, rather it is the same.
That of course assumes the wholesaler above me does not raise his price.
But of course he does for the very same reason.

There is really not many winners here and a lot of losers.

[Brucebubs]

Originally Posted by Riverwolf

OK, I think I have a clearer picture. Not that I like it.

If I had a store that sold 500 2x4's a week.
Now I can only get 250.
But my operating budget relies on the income of 500.
If I double the price, I don't really make more money, rather it is the same.
That of course assumes the wholesaler above me does not raise his price.
But of course he does for the very same reason.

There is really not many winners here and a lot of losers.

What if you could only get 250 but you had 2000 customers wanting to buy?
Customer demand exceeds your supply.
What if some of those 2000 customers started offering you more than your asking price?
Would you say no or give them priority?
What they all were prepared to pay more to ensure supply?
Would you say 'No, I'm only going to sell them at the regular price'?

[Pura Vida]

Sure. But if you could get 500 2x4's for the original price (supply), and the same number of people wanted them (demand), your price would likely remain unchanged. When either factor changes, it's going to impact the market price, and it can easily work the other way.

Example: tech products. The newest gadget will command a premium price; everybody wants it (demand), and nobody has it (supply). But flash forward 2-3 years, and that same item will be offered for a fraction of the price (widespread availability; demand shifts to the latest hot item).

Example #2: seasonal clothing / accessories. Buy summer clothing at the beginning of the season, and you'll pay full price (or what the retailer wants to sell) b/c demand is high and supply may be low to start. But that same item may be sitting on the clearance rack at the end of summer (or later) b/c there's no demand for it (reduced demand outstrips reduced supply).

Example #3: collectible item. 100 of an item are made. The first 90 are sold at asking price, and people realize it's way better than originally thought. Those last 10 items are going to be in high demand and low supply, so guess what happens to the price? Up, up, up.

I just read about a band, who released a single 10 years ago on vinyl, and collectors bought them up, driving the price beyond what normal fans could afford (hundreds $$$ for a record). So, the band went back and pressed more vinyl to flood the supply and bring prices back down for their fans. As long as there is no distinguishable way to tell apart the pressing dates, this will work and stick it to the collectors, in favor of the fans.

[blue]

Originally Posted by Dru Edwards

The vintage Les Pauls were the first thing I thought of.

Riverwolf, it's a balancing act. As an example, the increase in demand for lumber has increased over the past year and supply can't keep up, so prices climb. As the price climbs, some of the demand decreases until there's an equilibrium. If the price goes too high then demand goes down to a point that there's an excess in supply. When that happens, another correction is required to reach equilibrium.

Out here where I am in the PNW, Dunn Lumber limits how much Cedar Board a customer can buy! And the price is crazy.