Economics & Pricing.
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When politicians try to impose rules on free markets to make certain constituents happy….things can go awry. These implications usually take some time; but when they do, it can hit the country as a whole.
We all remember Economics 101 as a course in charts, laws and numbers. This section will dispense with that. We’ll examine economics and the real world.
Wages & Income: During political campaigns, candidates like to draw lines between the haves and the have-nots. If you’re a have-not, you’re getting screwed by the haves. Politicians insinuate that monetary earnings are a zero sum-game.
If the rich are getting richer, the poor must be getting poorer. This assumes we live in a world in which we all fight for a piece of the same pie. If the rich guys have 70%......then everyone else is fighting over 30%.
The truth is, the pie is always getting bigger. Earnings are dynamic. They reflect changes in technology, processes and efficiencies. Workers who adapt to newer in-demand skill sets will find themselves with higher wages. Other workers may find certain positions become obsolete. People will gravitate to higher earning positions thereby adapting to new advances.
When lawmakers enforce minimum wage, I can see two things happening. First of all, you guarantee a certain wage for workers who engage in positions that require minimal skills. On the other hand, by creating this “floor” on wages, you attract workers who might have otherwise looked for a more skilled position.
When workers know they can make more money doing a job that is in demand as opposed to a job that pays next to zilch....you create the incentive to improve.
If the wages for sweeping a floor were to drop so low that people would look elsewhere for work………there is a good chance those wages would rise to attract demand.
National Economy: When government economists measure the rate of inflation they take on a tough task. They measure the rate at which prices rise as additional money enters into circulation.
There are so many items in the economy how do you know which products to measure? One possibility is to take the price of everything for sale and calculate the rate of price increase & decrease. Do we weight certain products more than others? Well it doesn’t matter. Because that’s not how we measure inflation.
We create a basket of commonly used goods and measure that. The problem with this concept is prices determine which goods consumers will use. Years ago televisions, computers and other consumer electronics were very expensive. At that time, these products were not measured in the basket of commonly used goods.
Over the years, the process of consumer electronics dropped and these products are found in nearly every home. Is it possible that the measure of inflation was overstated at that time because this price drop was not accounted for?
The point being, we all know the price of energy and food are rising. But can these increases be offset by the drop in prices of other goods such as clothing? How reliable is the measure of our economy?
Another economic fallacy is import restrictions. Sometimes politicians feel they can save American jobs by restricting the imports of a competitive product. This happened with the steel industry. However by restricting cheaper imports, you force other U.S. industries to use more expensive goods. The end result being higher priced products, decreased sales and job loss in the long run.
Internationally, some governments have subsidized medial care. When you institute artificially low price controls…..certain things will happen. Even if its medicine. People will demand more of it. And if there’s not much money to make by providing it, supply will run low. Under a situation like this….price has got to rise.
If health care providers have an influx of patients and patients have limited health care alternatives, a parallel health services market will develop. Consumers that can afford "better" care will pay it; thus attracting qualified practitioners seeking higher pay. Unless the government forces one type of health care for all people…..a better quality of care will become available for those that can afford it.
Developing Countries : Why are some countries wealthy and some poor? Many people believe the answer to be summarized in one word. Exploitation. Or maybe, countries such as the U.S. aren’t giving enough free money….errrrr…aid that is. If wealthy countries just gave more…..there wouldn’t be any Third World countries.
Wrong. First of all, to use an example….200 years ago the United Sates wasn’t born rich. It was the culture, determination of the people and presence of natural resources that got us here.
Countries differ in their customs, political structure; some have tyrants and dictators as leaders. Some countries are barren and do not have climates hospitable to agriculture. Some are prone to lawlessness while others more easily accessible by commercial centers.
Understanding these facts and differences puts solutions more in perspective as opposed to just dumping money into the laps of poor nations and hoping wealth will just happen.
Pricing Prices are economic messengers. They inform consumers of perceived value, supply and demand.
If a huge iron ore reserve was discovered somewhere in South America, this information would find itself reflected in the prices of steel products. Although most consumers would have no knowledge of this discovery or any idea how iron ore is processed…..this event would send its message via lower prices.
Companies can also send messages about what they feel the value of their product is to the consumer. An example of this is popcorn. If I went into a store and found the price of a bag of popcorn was $5.75, I’d inquire as to whether someone was going to feed it to me.
However, in a movie theater I’d gladly pay that amount for popcorn and $3.50 for a cup of diet Coke. The value I’d receive while stuffing my face as I watch my favorite movie is worth it.
When you price your product, discover what value you offer your customer. And must I say it…….fulfill it.
Your job is to understand your customers…..why they buy your product….and are there things you can add to your product to make it irresistible. You can charge higher prices when customers believe they can get services and qualities from you, that they can’t get elsewhere.
Ever hear of price discrimination? Well, you can’t be all things to all people. Even when it comes to selling bottled water. Some companies can get away with charging a higher price than others.
Some of your customers can afford and will want your deluxe model. Some will want the standard. Segmenting your market and serving both customers is more effective than trying to sell a product that fits all.
Economics & politics don’t mix : Economics and politics have two different frames of reference. Political logic operates in the world of “what should be.” Economics operates in the world of “what is.”
By setting certain policies with a political agenda, you are trying to serve certain groups which could be at the expense of others. Economics looks at what happens to the natural progression of supply & demand. Included in this progression is the evolution of an industry, technology, jobs even a society.
Looking at the market this way helps predict future events…..based on pure business principles.
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