In The Beginning...

...there was supply and demand. It is so important and so consistent, it is called the "Law of Supply and Demand". It is the most powerful influence on the market, but it is not taught in most schools unless you are an economics major. I'm absolutely convinced this lack of education costs our economy huge amounts of money. One quote I believe is so very true is "Ignorance costs the American economy more than anything else".

I am a big fan of Guitar Hero so I'm on their community forum occasionally for tips and I am amazed at some of the posts. There is always a new thread with several posts like this:

"GH is rippin' us off! That stupid extra guitar controller I just bought was 50 bucks! It's probably $2 worth of plastic so they shouldn't charge that much!"

The first problem with these quotes is "...I just bought..." It must not be "too expensive" or they would not have purchased it. The second problem is they don't consider the man hours put into developing that controller. Game developers are paid pretty well so it's not cheap to develop games and accessories. The third problem is nobody seems to take into account the number of hours of fun you get for that $50. Compared to most forms of entertainment, it's a cheap "per hour" cost. (Those last two don't have anything to do with the supply/demand issue, just pet peeves. ;)

All things considered, is $50 too high a price for the controller? Not when you take supply and demand into account. You can find the true "value" of something when supply = demand. If you can crank out X number of controllers a month and enough people are willing to by X number of the controllers each month at the $50 price, then that is the value.

This is the point every manufacturer or service provider wants to reach. They all try to figure out what the "magic price" is so they can maximize their profit, keep up with production and not have a bunch of unsold stock left at the end of the selling period.

If supply does not equal demand, then you get fluctuations in price both up and down.

A good example of what happens when demand far exceeds supply was the 1996 release of "Tickle Me Elmo". When that doll was first released at Christmas time, the manufacturer had no idea it would be so popular. Everybody wanted one for their kid. The stores receiving the dolls decided they would set the price at around $30 when they arrived. The word spread about how popular the doll was going to be so once the company shipped out the first batch of dolls, they were gone in a flash. Enterprising people waited hours to get in stores and get a doll. They knew the demand was so high they would surely be able to make a profit by reselling them.

Well, they were right. Since the manufacturer could barely supply half as many dolls as the people demanded, the price went through the roof. Private resellers listed the dolls on eBay and there were reports of this $30 doll selling for up to $1500! Demand was much greater than supply so the price went way up.

A good example of what happens when supply exceeds demand is Overstock.com. When companies have more supply than they can sell, they want to get it out of the warehouse and make room for another product that will sell better. To do this, they drop the price and sell it to a place like Overstock.com. Overstock.com gets such a good price on these items they can turn around and mark the price up for retail but still sell it for less than the usual retail price. Supply exceeded demand so the price dropped.

Supply and demand affects everything. It affects the retail market, the employment market, the stock market, the currency market, the tax market (yep, taxes are a market too), literally everything. That is why it is important to understand how it works and to teach our children about the greatest market force. It affects everyone, every day so if you grasp how it works you can't be fooled by rhetoric and you can make informed decisions about what is reported to you on a daily basis.

I hope it didn't bore you to death, but I think it's important to make sure all readers are exposed to this important concept before I get started with the actual problems we find in today's economy.

If you would like more info on supply and demand including a graph of the supply curve and demand curve check this site out http://www.netmba.com/econ/micro/supply-demand/