| Sunday, November 16, 2008 - 02:25 am |
Hah, a battle of wits with the master, and me almost out of ammo. But, I haven't run out yet...
Those who've finished their intro to economics shouldn't say things like "supply will always meet demand" and leave it at that. Demand for most products may be endless, and supply in fact limited. But at any moment supply and demand will meet at some price, if left alone. Price is key.
BTW, arrogant human thinking real life is what enables us to grow hundreds of bushels of apples on a parcel of land when we thought only 100 bushels could be grown. If the price is high enough, we can invest in new varieties of trees, new irrigation methods, more intensive cultivation practices, less wasteful harvesting practices. We look at land thought not to be good growing land at one price, and find it is less productive but still worthwhile at a higher price. Et cetera.
Anyway, I spoke to the apple market-maker, and while he wouldn't give up all his secrets, this much I discerned. First, there are more buyers than the individual people...there are bakeries, apple sauce manufacturers, etc. To maintain the analogy I need to change a number...say there are only 50 people who each want their daily apple, and the businesses in total want another 50 daily. Again, the daily supply appears to be 85. Yet all 100 demanded apples end up being provided.
Each day the people place their orders, mostly for one apple at the market price. They trust the price will be fair. Meanwhile the businesses place their orders mostly at staggered prices. They have inventory, enough to last a few days, and try to get the best price while maintaining adequate inventory. So they'll ask for x apples at price p, and be prepared to ask for the same x at a slightly higher price, say p + 8, the next day, if it hasn't already been filled. Plus they ask for another x at the new p, which adjusts a little each day.
There are a number of suppliers. They each have a pipeline of apples coming to market. While 100 apples may be sold on average daily, they have up to maybe 400 actually for sale. They start high, with 100 apples all together at say p + 30, and each day knock the price by say 10. And add another 100 at p + 30. Some start higher or lower, and some decrease it each day by 8, or 12...keeps it interesting.
So the market maker has all these buy orders, and all these sell orders. Each day he matches up buys and sells. Except under severe shortages all the buys at market price get filled. He might have to go up to p + 20 or p + 30 range, but they get filled. Could also be at p - 10, or lower. At some price though, supply meets demand.
Even though 100 apples are eaten each day, and 100 ripened each day, in any given day more or fewer can be sold, and this imbalance can persist for some time.
But we know all this. I asked him how he determines p. He wouldn't say. It may be some average, or median, price. Perhaps you know. It's not that important though. What I add is this: when he publishes the demand, i.e. the number of buy orders, he doesn't count them all. Likewise with supply. I think only the buy orders that are at p or greater are counted, and the sell orders that are at p or lower are counted. Do this simple experiment. Pick a product you have in stock, check the shortage. Then offer some at best price. See how the shortage decreases? Now cancel that order, and place one at a fixed price, higher than the market price. See how the shortage does not decrease? Supply is offered, and is not counted against the demand. Why is there more uncounted supply than uncounted demand? Because there is a lot of demand at market price ("best price") whereas there is very little supply at market price...most is in the limit orders placed by corps.
Go ahead, shoot a hole in my theory, send 2 hours of my day to the recycling bin. But I think it's right.
For those watching at home: most of the mechanics of the "apple market" (simcountry market) only vaguely resemble those of real life markets.