Chapter 16 Chapter 2 Practice of Supply and Demand

Why do many bars charge money for drinking water, but provide free peanuts? Why do many computer manufacturers provide free software whose market price exceeds the price of the computer itself? Why does a mobile phone only sell for 39.Ninety-nine dollars, but an extra battery for the phone costs fifty-nine dollars.ninety-nine dollars? Why are the most expensive rooms in high-rise buildings in India on the upper floors, while the most expensive rooms in low-rise buildings are on the lower floors? Why do many people want to buy a big house when their children grow up and leave home after retirement?

Why do hotel prices in Sharm El Sheikh be the lowest when the room occupancy rate is the highest? Why is color film cheaper than black and white film? Why rent a $20,000 new car for forty dollars a day, but rent a $500 evening dress for ninety dollars a day? Why do many laundries charge more for women's shirts than men's? Why have Hindi-language films attracted more and more audiences in recent years? Why are brown-shelled eggs more expensive than white-shelled eggs? Why is Hallmark Cards giving out free non-holiday cards? Why in the photo printing shop, the second set of the same roll of photos is free of charge?

Why do the best-selling books and CDs sell for less than the less popular ones, and why do the best-selling movies cost more than less popular ones? Why are top-tier private universities not charging much higher tuition fees than second-tier private universities? Two economists were walking to lunch when they saw what appeared to be a hundred-dollar bill lying on the sidewalk.The younger economist was going to pick it up, but the older one stopped him, saying: It must not be a hundred-dollar bill. Why not?the young asked. If so.Someone picked up the elder's answer a long time ago. Of course, older economists are not necessarily right.But his reminder implies an important truth that people often ignore, that there is no free lunch in the world.Money doesn't lie on the ground waiting for you to pick it up.Whether in the past or in the future, the only way to earn real wealth is still talent, thrift, luck, and hard work.

Yet thousands of people seem to think they can get rich easily.They have seen others do it.In the 1990s, someone made a fortune by exchanging their old economy stocks, such as General Electric and Procter & Gamble, for Oracle, Cisco and other high-tech stocks that made the Nasdaq skyrocket. made a fortune.Some people borrowed desperately, bought real estate that was far beyond their personal affordability, and became rich overnight. Why doesn't the routine apply anymore?People who thought they could make a fortune first explained it with confidence.For example, in the 1990s, many bull market analysts claimed that traditional pricing formulas were obsolete because the Internet changed the rules of the game.With B2B e-commerce, some companies have reduced their operating costs by as much as thirty percent, so there's no doubt that new technologies have dramatically increased productivity.

But today, people realize that they should have realized that the greatest value of an e-commerce company is not how much it may increase productivity, but how much profit it actually creates.Companies that are the first to adopt new technologies continue to reap substantial profits from them.However, as in the past, once competitors adopt the same technology, then, in the long run, the cost saved by the new technology will not bring higher profits to producers, but reduce The price of the product benefits consumers. So the dairy farms that were the first to use bovine somatotropin, which increases milk production by 20 percent, reaped huge profits in the short term.But with the widespread use of hormones, increased production has driven down milk prices, reducing profit margins.

The same profit curve is ultimately reflected in the companies on the Nasdaq stock market that provide new technologies. B2B e-commerce organizations may indeed save manufacturers hundreds of billions of dollars.Companies that can adopt new technologies, like dairy farms, face fierce competition.So the cost savings did not turn into higher profits, but only lowered the price of the product. The no free lunch principle reminds us to be wary of opportunities that are too good to be true.It predicted the Nasdaq crash in March 2000.Used together with the cost-benefit principle, it also helps us understand more common patterns in common markets.As an example, let us think about the selling price of a product.

Because people have different tastes and incomes, there is considerable variation in the price they are willing to pay for any one product.Can be like Adam.Smith said in "The Wealth of Nations" that in the long run, the price of a product should not exceed its production cost.Otherwise, profit opportunities are bound to lure competitors into the market.As competitors increase, supply will also increase, eventually driving down prices and approaching costs. Yet there are numerous examples of different buyers paying vastly different prices for essentially identical products and services.They seem to violate the above-mentioned non-free lunch principle.Why didn't competition from other sellers pull all prices to the same level?The examples we give in Chapter 4 illustrate this point directly.For now, let's just say for a moment that in many markets competition does drive prices to parity.

For example, within a limited range, the price of gold is the same in New York and London, and it is sold to corporate executives and elementary school teachers at the same price.Suppose an ounce of gold sells for $800 in New York and $900 in London.Well, someone could buy an ounce of gold in New York and sell it in London, and instantly make a hundred dollars.The law of one price (in fact, it is a replica of the principle of no free lunch) states that the difference in the price of gold between two cities will generally not exceed the transportation cost between the two places. The law of one price works best in highly competitive commodity and service markets.Broadly speaking, in these markets, numerous suppliers sell highly standardized products.The gold market is a classic example.Gold is a highly standardized commodity, and it is relatively easy for new companies to break into the market once profitable opportunities arise.

What reinforces the law of one price is the possibility of arbitrage (buying low and selling high without risk).To buy a pound of standard table salt, rich people may be willing to pay more than poor people because of their higher ability to pay.The price of edible salt is the same for all.The law of one price states that any supplier that tries to capitalize on the idea that wealthy people are willing to pay a little more creates an immediate profit opportunity for competitors.Even if sellers team up to sell high prices to the rich, the poor will get in the way.They bought salt at the low price of the poor, and then adjusted the price slightly lower than the price of salt sold by the salt merchants to the rich, and then sold it to the rich to make a profit.As more and more poor people want to make a small profit from this practice, the difference is getting closer and closer to zero.

The supply and demand model of economists is essentially an invisible market force that determines the output and price of a certain product.Demand for a particular product is a measure of how many people are willing to buy it.In other words, it outlines how much people feel they benefited from buying the product.People will keep buying a product as long as they feel it's getting their money's worth.Its general pattern is that as the price of a commodity rises, the quantity demanded continues to fall. The supply of a particular product is a simple measure of how many producers are willing to offer that product for sale.As long as the product sells for at least marginal cost (the cost of producing the last unit produced), the producer will keep supplying that product.This is the basic supply principle.In the short run, marginal cost increases with one unit of output (this result is partly due to the low fruit first principle, which holds that it is always best to take advantage of the best opportunities first).Therefore, from the perspective of the supply side, the overall pattern is that the higher the price of a commodity rises, the more willing sellers are to sell more.

A market for a particular product is in equilibrium when the number of consumers willing to buy the product at the prevailing market price equals the number of producers willing to sell it.This equilibrium price is also called the market clearing price. Although we are bombarded with countless information in the market every day, the supply and demand model can exert its magic power to extract orderly patterns from it. Since market prices emerge when the supply and demand sides of the market are in balance, strictly speaking, it is incorrect to look only at the supply or demand side to explain price or output fluctuations.However, in some cases, by focusing on the seller (or buyer) side, we can also understand a number of important patterns in the market.The phenomena described in the following examples are mainly driven by the transaction demand side (buyer).