A smile never increases in price or decreases in value.

Supply & Demand

One of the most popular blogs I’ve posted so far was one called Simple Economics (click to read). In light of the popularity of that piece, I’m going to take economics a bit farther and introduce you to the supply and demand curves. If you’ve ever had an introductory course in economics, this will be old hat to you, but I’ve found very few people who understand these curves and their relevance on our everyday lives, even though it is a very simple concept.

lug.wsu.edu

In the chart above, the vertical black line on the left represents the price of a product or service. The horizontal black line at the bottom represents the number of units of the product or service.

You’ll notice there are no dollar amounts on the price line or unit amounts on the quantity line. For our purposes it doesn’t matter whether we’re talking about how many cents candy bars cost or how many dollars Cadillacs cost. The PRINCIPAL is the same for all products and prices.

The red curve labeled “Demand” represents how many units of the product the public is willing to buy. The blue curve labeled “Supply” represents how many units will be made available by producers of the item.

You’ll notice that the supply curve starts at a quantity of zero and a price of near zero. This means that no one anywhere is willing and able to produce this particular product or service at that price.

Let’s say the product is men’s loafers for the sake of illustration. It takes a certain amount of leather and/or synthetic fabric to make them, so the price will have to cover the cost of the material. It also costs a certain amount to acquire the machinery needed to make them, so we have to figure in the amortized cost of the machines plus the maintenance and utilities required to keep them running. Then we’ve got to pay the people who make the shoes, the clerks who keep track of billing, orders and all the other paperwork involved, the supervisors who keep everything flowing, the trucking company that hauls them—you get the idea.

If the total of all those costs figures out to X dollars per shoe and the public is only willing to pay some amount less than X, no one will make any shoes. But as the price increases above that point over on the left edge, the blue line begins to rise. Some company in Hong Kong or Malaysia or somewhere will be able to make them cheaply enough to sell them at that price and make a profit, so that company will start churning them out.

As the price rises along the blue curve, other companies around the world will find they can cover the costs of making the shoes and still earn a profit at that price. The higher the price on the blue line goes, the greater the quantity that will be produced.

Now let’s turn our attention to the red demand curve. It starts high on the price line but near zero on the demand line. If shoes cost that much money, very few people will be willing and able to buy them. If you drew a horizontal line across from the red line to the blue line at that price, there would be a huge gap between the number of pairs of shoes sold (top of the red curve) and the number produced (top of the blue curve). Something would have to give at that point. Some of the manufacturers would quit making them, and the supply would fall.

Back to the red curve, you can see that as the price drops, the quantity the public will buy increases. If the shoe market is left alone by outside forces, the price will continue to drop, and more and more people will buy, because we’re moving down the red curve, which moves toward larger quantities. But as the price drops, fewer shoes will be manufactured, because as we move down the blue curve, we move toward smaller quantities.

The meeting point of the two curves, labeled “Equilibrium” on the chart is the lowest price at which manufacturers will produce “Q” amount of shoes. Since it’s also the highest point at which the public will buy “Q” amount of shoes, it is the point of stability for the shoe market.

Wednesday, we’ll take a look at what happens when prices rise above or decline below this point of stability and what sorts of outside forces mess up the chart. See you then.

David N. Walker is a Christian father and grandfather, a grounded pilot and a near-scratch golfer who had to give up the game because of shoulder problems. A graduate of Duke University, he spent 42 years as a health insurance agent. Most of that career was spent in Texas, but for a few years he traveled many other states. He started writing about 20 years ago, and has six unpublished novels to use as primers on how NOT to write fiction. Since his retirement from insurance a few years ago, he has devoted his time to helping Kristen Lamb start Warrior Writers’ Boot Camp and trying to learn to write a successful novel himself.