Opus 2022-235: A Little Economics

Let’s talk economics.  I am not a trained economist.  That is why what I say might at least touch on reality.  I observe.  I think.  I read.  I price shop and watch unit prices.  I use spread sheets and can balance a checkbook.  I say I am qualified.  Possibly over-qualified.

We are hearing a lot of talk about recession and inflation.  While the elites try to redefine words, we go to the grocery store and look at our income.  Any cushion we had is losing air.  I wonder how working people who don’t have any wiggle room are making it.  Why are prices going up?  The media would have you think it is corporate greed but greed only works if you understand the forces that guide prices.

What forces go into the price of a product?

Supply and Demand is one of the biggest factors.  This means that if there is a lot of demand and a small supply then the merchant can raise prices and still sell all his products.  I know I went to the store to buy some lunch meat and the prices had gone so high I decided not to buy any.  Next week, when I returned, the price had come down enough for me to purchase.  Evidently I was not the only one not buying.  Demand went down, the price followed.  

Large stores like Walmart can also use the force of scale.  If you sell a hundred cans of soup and make 20 cents a can you do better than the small store that sells ten cans and makes 50 cents a can.  Wages also figure into demand.  If you can’t afford the brand name, you settle for the store brand which is usually cheaper.

Competition is also a factor.  I price shop.  I may buy certain items at Walmart and others at our local grocery chain HEB depending on the price.  My theory is they have people who go around checking the prices in the competition to make this harder on me.  That is good because if they are adjusting their prices, I don’t have to make so many stops.  Moving from California five years ago I was struck by the high price of produce.  I used to shop the ads and plan my trip home from work to hit all the specials.  I had four or five competitive grocery stores where here in Texas there is only one.  It makes a difference when you can go somewhere else.

Productivity means finding a way to make more product for the same amount of cost.  Or simply find a way to make it at a lower cost.  It was the development of the assembly line that made it possible for Henry Ford to bring the automobile within range of ordinary working people.  We see the same process today in electronics.  Fast food chains are experimenting with machines that work faster than people.  My daughter had a job with a major corporation and this was her focus.  Her math degree was in “operations research”.  When I asked what that was she simplified it for an old man as efficiency expert.  

The big elephant in the room that is often overlooked is government interference in business.  Much of the cost of goods you buy is the result of government regulation.  Many small businesses struggle to pay someone to fill out all the government forms.  Hiring quotas mean they are forced to hire people who cannot do the job but still must be paid.  Things like handicap accommodations are mandated by the government.  I am still trying to figure out why we need handicap parking at golf courses and gyms.  

And don’t forget government subsidies.  They sound wonderful.  They make it possible for the business getting the help to undersell the competition.  Often that puts the competition out of business, the subsidy stops and prices skyrocket.

Service is also a factor.  People are willing to pay more for convenience and a friendly face.  This is part of the success of stores like 7/11.  People are willing to pay more because they don’t have to wait in line so much.  That does not apply when the lottery is coming up.

Some of these factors we can work against.  Mostly it is beyond our control.  Shop smart.

homo unius libri