What is a Free Market? (Supply)

Supply, as it turns out is basically the opposite of Demand (duh).

The Supply of Good is simply the  quantity of that good that people are WILLING and ABLE to sell at a given price

Let’s suppose Karl Marx is a Manure Manufacturer. Assuming again that there are no taxes, no subsidies, anywhere at any time, we ask Karl – what is the cheapest price at which you would be willing to sell 1 Kg of Manure, i.e. at this price, would you still be in business?

Now Karl is a businessman so he has to do a few mathematical calculations and things about how much poop he can get out of his cows, e.t.c. and the conclusion he comes to is that he can sell 1 kg of Manure at a price of $1 and not lose any money.

Now let’s suppose that Biff Tannen is also a Manure Manufacturer. But Biff’s cows, for whatever reason, are more expensive for Biff to maintain. So, Biff figures after everything is added and subtracted, that he the cheapest price at which he can sell a 1kg of Manure and not lose any money is $2

Put that in a Table and we get:

Price	Quantity
$1	1
$2	2

Nowif I extrapolate this further, eventually I get a nice graph that looks like this:

(roundabout).

Now as you can see, if the price is high, everybody wants to sell manure. And if the price is low, only Karl Marx wants to sell shit.

So… is that really it as far as that whole fuzzy concept of ‘Supply’ goes? Yes. No, no, seriously! Whenever anybody anywhere uses the term ‘Demand & Supply’, the ‘Supply’ that they are referring to in that sentence, is this very concept.

Now people gunning for Nobel Prizes and PhDs and whatnot will complicate matters by taking about Marginal Costs equalling Marginal Revenue  and all sorts of other nutty concepts to show you that they really did do some work over the 25 year duration of their PhD. But it doesn’t change anything I’ve just told you.

Time to put these two ridiculously simple concepts together.
(Next post)

What is a Free Market? (Demand)

Where I define a much-maligned term.

A ‘Free Market‘ is a Market in which the Price of a good or service is determined solely by the Demand & Supply for that good (or service).

But what the hell is a Market?

A Market is a system by which goods and services are exchanged

I.e. Bill Gates wants to sell a computer. Laloo Prasad wants to buy a computer. If these 2 get together and perform an exchange, one can say there is a market for computers. It’s a very small market. But it’s still a market.Whoopy. So, that’s a market.

Now what the hell is Demand?

The demand for a good is the quantity of that good which people are WILLING & ABLE to purchase, at a given price.

Let’s suppose I ask Bill gates – what is the most that he would be willing to pay for a cup of coffee. The absolute most he’d pay – that if even the price were 0.0001 cents, or paise more, he would _not_ buy that cup of coffee. He tells me $10. And let’s suppose he’s the only freak in the world who would buy a cup of coffee for $10. And let’s also, for now assume there is no such thing as sales tax on the coffee, and there are no taxes or subsidies on people who run coffee places, no taxes or subsidies on coffee growers, coffee shippers or any income tax on Bill Gates.

It can then be said that if the price of Coffee is $10, then the demand for Coffee = 1 Cup.

Now let’s suppose the price is lowered to $9. At $9, even I wouldn’t mind buying a cup of Coffee.

Now here is where Economists make their first assumption – they assume people to be ‘Rational’* – what that means, in this case, is that if the MOST Bill Gates is willing to Pay for Coffee is $10, then logically (or rationally, or whatever), he would ALSO be willing to pay for a cup of coffee if it was LESS than $10.

SO – if the cup of coffee is priced at $9, there are two extremely rich idiots willing to buy the coffee, – me and Bill Gates.

So if I were to make a table it would look like this:

Price	Quantity
$10	1
$9	2

Now if the price of Coffee was lower by another dollar, me & Bill gates would definitely buy it – but so would other people. It probably won’t even be a sequential increase, but a geometric increase, i.e. if the price drops by $1, the quantity might increase by more than 1 cup. Now if I plot this as a graph, it looks like this:

Demand Curve

The more expensive the coffee gets, the lower the quantity of coffee ‘Demanded’. The cheaper the coffee gets, the higher the quantity demanded.

So… is that really it as far as that whole fuzzy concept of ‘Demand’ goes? Yes? No, no, seriously. Whenever anybody anywhere uses the term ‘Demand & Supply’, the ‘Demand’ that they are referring to in that sentence, is this very concept.

Now people gunning for Nobel Prizes and PhDs and whatnot will complicate matters by taking about Marginal Utility theory, Indifference Curves and all sorts of other nutty concepts to show you that they really did do some work over the 25 year duration of their PhD. But it doesn’t change anything I’ve just told you.

When somebody talks about Demand (for something), they are simply telling you, how much people are willing to pay for / buy something at whatever the current price of that something is.

Seriously.

(move on to next post – Supply).

Economics 101

Where I try and explain things as simply as I can (really long post)

We live in very interesting times, say the Chinese, and they’d be correct. For things have come full circle. In 1989, a wall, and an Iron Curtain, came tumbling down. Along with that, the Specter that hung over Europe also disappeared. Communism had failed. Capitalism had won.

And so began the heady decade of the 1990s. A period where America, Europe and Southeast Asia prospered, China gained momentum, and India finally woke up, to a non-’Hindu growth rate’. Looking at the abject failure that was, and is communism, the world realised that ‘Capitalism’ was the only way forward.

Well most of us thought it was, at any rate. Except for those who insisted on keeping their blinkers on. These blinkered folk continued to plod on, spewing their nonsense, talking about how we needed to think about ‘The Poor’, ‘The Common Man’ , and tried to expose the ’seedy underbellies’ of many a success story. But they fought a losing battle.

Until now. 2009, and the world finds itself in a crisis. Unemployment rates are high, growth rates are low, and General Motors is owned by the United States Government. Our old blinkered folk have come out of the woodwork saying the time has come at last, and what they had been saying all along has come true and that ‘Capitalism’ has failed, or the ‘Free Markets’ have failed. In saying so, they reveal their ignorance about Capitalism, Free Markets & Economics.

Before delving into any technicalities, let’s begin at the beginning: What the Hell IS Economics.

A ton of people have tried to answer this question, most have done so with the simple sentence I am about to write below:

Economics deals with the ‘allocation of scarce resources’.

Basically, there is a fixed amount of chocolate cake in this world. Say about 10 Kilograms. But there are a 100 people (and growing) who want that cake. Now…

• what is the ‘best’ way to distribute that cake?
• Can we bake more cake?
• Can we bake something else which takes the place of that cake?

Economics tries to answer that question. Now, when you talk about Economics, you are likely to come across many ‘-isms’. Capitalism, Communism, Socialism, otherisms.

In the view of this author, Communism and Socialism aren’t economic theories. They’re religions, kinda like Scientology. You will find people who believe in these last two, in the face of 100 years of solid evidence that they don’t work, and yet, they still feel this is the best way to live. Again, if you try to argue against the fanatics who believe in Marx, Guevara and any other murderer, the feeling one gets is the same as when one tries to tackle religion.

Now I don’t consider Capitalism an ‘-ism’ either. Why? Because many of its tenets are simply human nature. More on this later. if you got this far, it’s time you moved on to my next post: the definition of a Free Market.