My son is doing an oral report this week explaining the law of supply and demand. As I'm explaining it to him, It strikes me how easily we forget that this basic idea explains just about everything. So before you go do your holiday shopping, I thought maybe the adults in the room could use a refresher.
Let's start at the beginning:
High supply + low demand = low price.
Low supply + high demand = high price.
High and low supply are easy to understand (the thing is either plentiful or scarce) but how about demand? WHY is there high or low demand? Why does a little house in LA cost much more than the same house in Michigan? well, because not that many people like snow AND high unemployment. Why is Groupon giving you such cheap deals on skydiving lessons? Because not that many people can justify spending money tempting fate while they are also trying to pay for groceries AND health insurance (and not that many people have spouses who will let them).
My son says some things cost more because one thing is "way more cool" than the other. Which brings us to the next point: perceived value.
Why is a Mac more expensive than any other computer, and Apple almost never has to give people deals to get them lining up at their doors with credit cards drawn? Because we think a Mac is "way more cool". We are willing to pay a premium for something we think is better. Why would you pay $1,000 for a Prada purse? Because you think it's better than other purses (or that people will think you are "way more cool" when they see you out with your Prada purse). It doesn't matter if it's actually better than a purse that sells for a fraction of it's cost, it's about whether you think it's worth it.
We are willing to pay a premium for goods and services as long as we believe we're getting a good value. An $800 an hour lawyer isn't just being a pig, she's getting paid what people are willing to pay a person that they believe is giving them the best service, and there's a limited supply of her time. Not to say it is the best, but If you hired the $100/hr lawyer, and it didn't go so well, you'd say, "well, I guess I got what I paid for".
Perceived value changes over time. My father just reminded me of how electric typewriters cost $500 when they first came out. So remember that the law of supply and demand really only tells us what anything should cost in this particular moment. If everyone thinks a certain thing is "way more cool" at a certain moment, the price will be high.
Now sometimes you get a bargain. Sometimes, low demand is just a function of limited awareness. Sometimes the hairdresser at the salon around the corner who only charges $60 a haircut is actually just as good as the one in Beverly Hills who charges $400. And sometimes you score a really nice, original Eva Ziesel bowl for a buck at a garage sale (yes I did, thank you very much). That's what's called "arbitrage". Taking advantage of the difference in the value assigned to the same item in two different markets. Milk costs $3 a gallon at market A, and $2.50 a gallon at market B. Arbitraging is what we think of as getting a good deal. Every housewife should really be thought of as the Chief Arbitrager for a small family firm. My husband has been scouring Ebay for years trying to find an arbitraging opportunity on a reissued '59 Les Paul (i. e. buying it for less than he could sell it for. Not that he would sell it). Then he could tell all his friends about the deal he got. And everyone loves to tell the stories of a great deal they got --- it's not a complete experience if you can't flaunt your arbitraging triumph. And a great deal is like money in your pocket, right?
Well, no, it's not actually.
So the bottom line is: When you go out and spend money this holiday season, remember that
a) The person receiving the gift may not want skydiving lessons.
b) They won't enjoy them more because you got a good deal on them.
c) A young child perceives the packaging to be of equal value to it's contents, so you can save money by just giving the little ones boxes.
d) Bigger kids often perceive value differently than their parents. Mine enjoy obsolete technology, like an old polaroid camera or that typewriter, which you can now get for pretty cheap.
e) Whenever possible, wait until AFTER christmas to buy stuff, so you can take advantage of retailers attempts to right supply demand imbalances (i.e. sell off all that stuff no one bought) because you are now totally savvy about arbitraging.
and finally,
f) Forget the whole "money in your pocket" thing, no matter how good of a deal it is, if you're broke, don't shop!
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