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:

Supply Curve(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)

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s