Thursday, May 24, 2018

Three Important Aspects of Marketplace Demand and Three Important Aspects of Supply

Stuart K. Hayashi

Marketplace demand is not synonymous with desire. I can greatly desire a castle. But if I do not have enough wealth to trade for the castle, I have zero demand for the castle. Someone having a desire for X is a necessary but not sufficient condition for hat person to have marketplace demand for X.

Marketplace Demand
Marketplace demand for X has at least three components.

  1. The first is that the buyer can access enough wealth to trade in order to obtain X; either the buyer already has enough wealth to purchase X or the buyer can make a deal where the X purchased on credit, the buyer making one down payment and then paying for the rest in periodic installments. That is, the buyer has marketplace demand for X no more than the extent to which the buyer can access her own supply of Y to exchange for X.

  2. The next necessary component is desire. It may be the case that the buyer is wealthy enough to purchase X but still has zero demand for X on account of not desiring it. X might have specific attributes that make the buyer covet or reject X in particular, but buying decisions in general are often a consequence of the buyer having some inborn, preexisting general and abstract desires. Thousands of years ago, there was already a desire among merchants and the wealthy to be able to communicate instantly with someone else on the other side of the Earth. At the time, that preexisting desire could not be satisfied, even for the world’s richest pharaoh. On the scale of specifics, the pharaoh could not desire a long-distance telephone or the internet, as no one knew what those were. On the scale of general abstractions, though, the pharaoh did have the general desire to be able to communicate instantly with persons thousands of miles away. Today, this broader, more abstract desire can be satisfied by such technologies as long-distance telephone calls and the internet.

  3. That brings us to the final component of marketplace demand for X in particular: X’s attributes itself. Upon observing X, the buyer has no marketplace demand for X until and unless the buyer observes that X possesses attributes that enable X to satisfy the buyer’s preexisting need or desire. Note that that last aspect — X possessing the properties that enable X to satisfy the buyer’s desires —are on the supply side; that is an area where the supply side influences the demand side.

Here I should note three pertinent aspects of X on the supply side.

  1. The first is the obvious aspect of the supply of X: the principle that the more wealth that customers and clients are willing to shell out to obtain X, the larger number there will be of vendors to supply X.

  2. However, the second aspect of X on the supply side is what I mentioned above: an aspect of the supply of X is the specific set of attributes that X possesses that distinguishes it from all other products, including all the products that were already on the market prior to X being introduced to the market. The attributes of X are part of what the suppliers are supplying, and if those specific attributes are what make X attractive to customers and clients, then they are essential to the meeting of supply and marketplace demand: where attributes of X are supplied to satisfy the desires and marketplace demand of the buyers.

  3. The third aspect of the supply of X is this: there is a natural, built-in, default constraint on the quantity of X that be on the market at any given moment. This is what economists mean when they say that, as marketplace demand for X meets the supply of X, the “scarcity” of X on the supply influences the final price of X. This is not some sort of concession to Rev. T. Robert Malthus that all commodities, such as X are “nonrenewable,” and that one day the entire quantity of X will be depleted and no one will ever have X ever again. No, it may be the case that more units of X can be produced in the future. It may also be that if no more units of X can be produced, some substitute for X, which satisfies the same needs and desires that X does, can be produced and put on the market. But the point here is that at any one moment, such as the present, there is a specific quantity of X on the market; that present quantity is not “infinity.” The reason for this is that units of X are not produced ex nihilo; the production of X requires that the vendor of X has to input resources — be they man-hours or raw materials or equipment or any combination of these — to make units of X accessible to clients or customers. And every such input is a cost imposed on the vendor. Because the production of units of X is the consequence of the vendor inputting “scarce” resources, the “scarcity” of those resources results in the inputting of those resources imposing a cost on the vendor. Because the inputs of “scarce” resources impose a cost on the vendor, only a finite quantity of X is availed by vendors at any given moment, rendering X “scarce” as well.

Thus we find the following. The most direct influence on the price and economic value of X is the confluence of market demand for X with the supply of X. The value and/or “scarcity” of the inputs that went into making X available is a factor that does not influence the final price or economic value of X directly. However, the fact that there is a limited supply and quantity of X at any given time is something that directly influences the price and economic value of X. That is, the two are true:

  1. The value and/or “scarcity” of the inputs that went into making X available to consumers or clients is not a direct factor in determining the final price and economic value of X. Yet:

  2. The final price and economic value of X is influenced more directly by the “scarcity” in the supply and quantity of X. And important considerations that impose a natural, default, unavoidable constraint on the quantity of X that can be available at a specific moment, are the facts (a) the inputs the vendor needs to make X available are “scarce” themselves and (b) the “scarcity” of those needed inputs makes the inputting of those inputs a cost burden for the vendor, thus (c) the “scarcity” of the inputs the vendor needs to make X available to the market imposes a likewise “scarcity” on the commercial availability of X itself.

In that respect, although the factors that directly influence the price and economic value of X are marketplace demand and supply, the fact of the “scarcity” of the inputs needed to go into the supplying of X means that the “scarcity” of those inputs indirectly influence the final price and economic value of X. This is because X’s final price and economic value is affected directly by the “scarcity” of X, and the scarcity of X is the result of the scarcity of the inputs that went into production of X.