As a people become more affluent, the influence of the price factor declines. The supply and demand paradigm loses potency and becomes less valuable as a tool in much of the analysis. This is because market decisions are not based on price. Or, buying is superseded by spending.
In “The Visible Hand” I wrote that the rich can handle price
increases but not supply shortages. This
article deals with price.
Under normal economic models, the law of supply and demand
states: When demand exceeds supply, prices rise. When supply exceeds
demand, prices fall. That, of course is
still valid. However, there is more to
it than that.
Theory + Case Method.
To adjust to the market forces, if prices increase, the
demand will taper off as people find prices to high and prices will level off
or began to fall.
Case
Avocados sell for $2.00
Consumers do not buy avocados at $2.00
The avocados begin to turn.
The manager of the market cuts the price to 99 cents (when
no one wants them).
I’ve seen this failed pricing policy repeated too often over
the years. Now, avocados are priced to
sell.
However, with rising affluence, demand does not abate as prices rise. In this scenario, people who can afford them, buy the avocados at $2.00. The rich absorb the price increases. Then, to exploit the demand, avocado prices increase artificially to $2.50. The rich buy them to serve a much more lavish lunch.
Of course, food is perishable and avocados are not a staple.
E.g. Bread, milk, mayonnaise, cereal, peanut butter, baloney, tuna fish, and so
on.
Back to the Paradigm
As supply falls and demand does not abate as the rich absorb
the price increases, the increases place a greater hardship on those who fall
between rich and poor. Example: gasoline
prices rising from $3.39 a gallon to $3.89 a gallon.
The poor buy less, or buy something else, or—as with petrol—stay
home. As this happens, one or two of two
things will happen.
The absorption of price increases and the increase in
purchasing and demand shifting will lessen the demand for that which is in greater supply
(or less demand) forcing prices down and sellers revenues along with them.
The rich will buy (at an attractive price) what is out of
demand favour either for the purposes of conspicuous consumption or speculation. This will further
hurt the poor.
At this juncture, conspicuous consumption becomes a misnomer
because what is being purchased is not being consumed as needed and or as wanted.
Ergo: Gratuitous Consumption. Or, in some cases, Ridiculous Consumption.
There is a variation on gratuitous consumption. To explain
this, I will create a metaphor. This is
a metaphor!
A $35,000 handbag
A $1,000 handbag
People are employed to make handbags.
I can hire one person to make a $35,000 handbag.
I can hire 35 people to make one handbag each to sell at
$1,000 each.
If I hire one person to make a $35,000 handbag, and pay him
$1,000, I have a $34,000 profit. I cannot pay 35 people $1,000 each to make one handbag each,
to sell for $1,000 each. On a percentage basis, I pay 35 people $28 each and make a
$34,020 profit on the enterprise.
With rising affluence, I can cater to the rich or I can
cater to the less affluent. This requires cutting costs (wages) and outsourcing
or off-shoring my labour.
NB: We are not discussing the affluent.
We are discussing rising affluence. We are discussing a new paradigm. And, rising affluence for the purposes of
this discussion refers not to those who have more, but rather to those who
spend more. (Low key displays of wealth
still exist. But you don’t see as much of it anymore. Then again, you wouldn’t.)
Remember that $1,000 handbag? That handbag now has a designer inscription
and a $2,000 price tag. What happened?
To understand this, we go to the question, “What makes that
$35,000 handbag worth $35,000. This is a
question often asked in the media. I
will tell you. That handbag tells people
you can afford to spend $35,000 on a handbag.
This differs from numismatic value.
The last “antique pocketbook” at auction may sell for
$35,000 because people collect them.
They are dwindling in number and availability. And, People believe that
they will increase in value, hence increase in price—there will always be a
market for them. Picasso, Monet, Faberge
Eggs, Harley Davidson motorcycles, coins, stamps and so on, fall into this
category. For our purposes, antique
pocketbooks.
There is a downside to this and this downside is not
new. Holland experienced this in the
1600s when a Tulip bulb sold for the price of a house. Things did not turn out well.
Now we come to what I call Ascribed Value. There is no numismatic or speculative (future
price + ROI) value, or significant increase in quality that precipitates or necessitates
the increase in price. Rather, speaking metaphorically or literally, the increase in
prices is based on what is written on the handbag—the designer’s logo and the
high class price tag appended to the handle.
What causes the price to rise is the imputed value.
DISCLAIMER:
This is not to suggest that a $35,000 handbag is not a piece of quality merchandise. It is a piece of quality merchandise. It has
This is not to suggest that a $35,000 handbag is not a piece of quality merchandise. It is a piece of quality merchandise. It has
- An attractive design
- Quality materials
- Skilled craftsmanship.
In addition, there is a big difference between a designer
handbag and a handbag with a designer label.
Back to Economics
A higher price was a valid factor when I paid $100 for a
pair of Florsheim® shoes rather
than $25 for a pair of shoes from the other store. The Florsheims lasted and lasted and lasted.
They were good quality, well made, and stylish.
(I suspect that the Energizer Bunny® wears Florsheim Shoes.
Elois Papillon, a character in the novel St. Lawrence Blues
(Un Joualonais sa Joualonie) by the
brilliant and highly esteemed French Canadian author Marie Claire Blais,
declaimed, “Credit is the poor man’s illusion of wealth.” Here, too, we move to a new paradigm, a new
social class.
With many of the consumer goods sold lately, the market
imputes quality based on price and a new social class is creates. Not the rich, but those who enable the rich
to get richer bases solely on the fabricated price of their products. And the richer they get, the greater the
value imputed to their products.
Remember that $1,000 handbag that sold for $2,000? It now sells for $3,000. Why?
Because the designer is richer.
That extra $2,000 is “Fabricated Pricing" based on “Imputed Value.”
Quality or Value?
That handbag is worth the extra $2,000 because it costs and extra $2,000
because the designer is now a wealthier ergo a more successful ergo a much
better designer.
In short: The value
of the merchandise lies in the price of the merchandise. The handbag is worth $3,000 because the
handbag costs $3,000.
“Then, the label spoke to the quality of the merchandise,
now the labels speaks to the price of the merchandise.” ~ Slim Fairview.
From, The Quotations of Slim Fairview © 2014
Robert Asken as Slim Fairview. All rights reserved.
From, The Quotations of Slim Fairview © 2014
Robert Asken as Slim Fairview. All rights reserved.
Warmest regards,
Slim
Slimfairview@yahoo.com
PS I was thinking about economics over the past week and something occurred to me. Perhaps, this is nothing new. Perhaps there have been many theses written about the above. It may even be a much studied paradigm. If it is, please let me know, I would love to read about it. Sincerely, Slim.
PS I was thinking about economics over the past week and something occurred to me. Perhaps, this is nothing new. Perhaps there have been many theses written about the above. It may even be a much studied paradigm. If it is, please let me know, I would love to read about it. Sincerely, Slim.
Copyright © 2014 Robert Asken as Slim Fairview
All rights reserved.
