Archive for the ‘Demand’ Category

The law of supply and demand isn’t a law!

August 13, 2007

“One of the oldest principles of Traditional Economics is the law of supply and demand.  A basic prediction of this ‘law’ is that the counterbalancing forces of supply and demand will drive a market to an equilibrium price and quantity level.”

“For example, if a car company introduces a new model that suddenly becomes popular, the company will typically raise the price while demand exceeds supply, expand production, and then lower the price once demand has cooled off and supply has caught up.”  (Lesson learned: don’t buy something when it first comes out; wait a few months and you can get it at a lower price)

“If, however, we zoom into a more fine-grained level, we see that real-world markets are almost never at equilibrium, supply rarely equals demand, and markets rarely come into balance.  In fact, virtually all markets are built around the assumption of disequilibrium rather than equilibrium.  Most markets have stocks of inventory and order backlogs.”

“Your local car dealer has a parking lot full of vehicles that are slower selling and an order backlog of ‘hot’ vehicles that customers are waiting for.”

“The law of supply and demand isn’t a law after all (at least not in any scientific sense); rather, it is more appropriately the rough approximation of supply and demand.”

— The Origin of Wealth by Eric D. Beinhocker

Congestion Pricing

August 8, 2007

Definition: Congestion pricing is increasing the price on something during peak usage.

Examples:

  • long-distance calls are more expensive during the day
  • airplane tickets are more expensive during the summer
  • in NYC the tolls on certain bridges and tunnels are increased during rush hour
  • in London people who drive their car into town between 7am and 6:30pm are charged a toll of £5

All of these are examples of price responding to demand: when demand for a resource is high, the price goes up, and when it’s low, the price goes down.

The telephone line, the seat on a plane, the bridge, the tunnel, and the road space are “resources”. They are not unlimited. When demand for a limited resource is high, the persons who are willing to pay the most get the resource.

Individuals weigh the cost of using the resource against its benefit. If the cost is too high, they find alternatives (such as calling during a non-peak time, or taking public transportation).

The goal of congestion pricing is to make the costs obvious to people. The hope is that when people are clearly aware of the costs they will make individual decisions that produce a collectively smart result, i.e. congestion is decreased.

— extracted from The Wisdom of Crowds by James Suroweicki