I’m sure you can think of some food item you used to enjoy that is no longer available. You might wonder why that item isn’t being marketed anymore, especially if everyone you know liked it and bought it.
I was thinking about this when a revelation hit me: at least as far as supermarkets go, whether an item is popular enough to succeed is to a large extent independent of consumer demand!
The problem is that no supermarket can carry more than a fraction of the brands and items available. The competition for “shelf space” is as fierce as for sunlight for plants in the middle of a rain forest. As a result the supermarket’s strategy is to maximize their profits based on their margin for each item: a very popular item that only nets the store a few pennies each might not be worth the shelf space compared to an item that is less popular but more profitable.
So in other words, the “supply and demand” theory of Econ 101 only applies in this case to the wholesale demand of the stores, not the end consumer! Perhaps a similar mechanism is at work for television shows: ultimately the networks and cable companies only care how much advertising revenue they can generate, rather than if anyone actually likes or watches their shows. Of course there has to be some consumer input, but it may not actually be the deciding factor.
So is one of our cherished fables about the free market, that people will get what they want, actually untrue?
Lumpy, I’m not sure I’m buying your argument here.
Everyone you know? Everyone? Every single person you know liked it and bought it? And how many people would you mean, two, five, one hundred? What percentage of the 1000’s of people that shop at that store each week are people who buy that specific product?
I cannot believe that if hundreds of people buy a product each week (or month), that a store would discontinue it. It would make no sense.
This is certainly true. A store must carry those items that most of its customers want most (demand). My great aunt Sophie might want the Lox and Bagels she gets in New York, but she’s going to be hard pressed finding it in the rural Midwest.
A store looks at its profits in percentages, not dollars and cents per se. They choose a gross profit margin (20%, 28%, 35% etc.) and price their products accordingly. For the most part, they do not say, “This pack of gum makes $.10, but this steak makes $2.00.”
Hardly. Although no one gets everything they want, I believe most people get most of what they want. I don’t think you’ve disproven the law of supply and demand quite yet.
I guess what I’m asking is: doesn’t the classical picture of supply and demand between two parties- seller and buyer- break down, or at least need substantial modification, in the real world situation of multi-layered transactions? Where each party (manufacturer- distributor- retailer- consumer) has their own interests that distorts the demand feedback up the supply chain?
If Gerber decided to produce Jalepeno flavored Apple Sauce for Infants, no matter how much Gerber wanted to sell it, no matter how much profit the distributor and retailer could potentially make on it – no mother in her right mind would ever buy it. The final consumer is the ultimate decision maker.
On the other hand, if Frito Lay (or whomever) decides that they don’t want to make Nacho Cheese flavored Doritos anymore, how long do you suppose it would take for another company to come up with a perfect substitute?
Sure, there is a measure of interplay between the manufacturer-distributor-retailer that effects what we can purchase and what we can’t, but I believe it is essentially immaterial. The fact remains; if most of us want it, we’ll mostly get it, and if most of us don’t, it will go away.
How does this “disprove the law of supply and demand”? If a supermarket can only make a tiny margin on a product, that is (presumably) because consumer demand will only support such a price. Or, if the small margin is because the wholesale supplier is charging “a few pennies” below market price (either reasonably or unreasonably) , then the demand for this (wholesale) product will suffer commensurately.
Really, I don’t see how your example exposes any “sexing up” of the received supply and demand pricing model.
IMHO the “Law of Supply and Demand” only truly exists when the system is perfectly closed and all parties have complete perfect information. Does these condition exist in the grocery store? No.
IMHO They teach it in Econ 101 because once you’ve learned it you spend the rest of your life finding that it’s never quite that simple.
“ultimately the networks and cable companies only care how much advertising revenue they can generate, rather than if anyone actually likes or watches their shows.”
And how do you think advertising costs are figured out? By how many people watch the shows!
BTW, perhaps you should state what you think the “law of supply and demand” is. It does not implly that all goods will be available, it states that as the supply of a good increases relative to the demand, the price will go down. And that as the demand for a good increases relative to the supply that the price will go up. (All of course in a nonregulated market.)
The Standard Economist Answer for Everything™: It depends. What they won’t teach you in Econ 101 is that demand for a good can be dependent on demand for other goods. People rarely go to a grocery store for 1 item. If they want a particular item that your store doesn’t carry they will go to one of your competitors not just for that item but for all the other items they wish to purchase at that time even if some or all of the other items are more expensive at your competitor. So there is an incentive beyond the profit margin for the particular item to stock items that have a high demand. The reason “it depends” is that this does not apply to all stores nor even all grocery stores. The nature of competitors and their locations can change this dynamic. People will go to a grocery store for only one item if it is on their way to somewhere else or their demand for the one item is so high as to make the time worh while. If the item in question is stocked by a nearby convenience store where people will not buy a lot of groceries, a grocery store may be better off letting it take up the demand for the item knowing they will only lose the profit for that item and not a full basket of goods. There may be other compensating reasons to not stock an item such as infrequency of demand or specific problems with shelf-space.
You may be confusing Supply and Demand with Competitive Markets - markets where no individual supplier can influence the price and products are indistinguishible. Almost never happens in the real world. Branding can influence product prices. Also availability of substitutes. There are barriers to entry (like shelf space).
Supply and demand generally holds true - for a given product an increase in price will result in a decrease in demand
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except
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“Inferior” goods. For example, when prices go up, demand for bus tickets or SPAM over plane tickets and veal may increase.
Some luxary or exotic items - An increase in price of the classic GI Joe with the Kung fu grip may result in higher demand.
I am sure you mean Giffin good (which are a class of inferior goods).
Inferior goods relate to income effects – an increase in income leads to a drop in demand of some goods.
However, if prices change there will be some income effect, if an upward change has a high enough income effect it can increase demand for a good – such a good is called a Giffin good.
Inferior and Giffen Goods: Normally, when income rises demand for all goods rises. A good is considered inferior if the demand for that good goes down as income rises. Classic example is hamburger. Demand may be quite high at lower income level, but a rise in income allows substitution of better cuts of meat.
A Giffen Good is a subclass of inferior good. A good example would be rice. For a poor family mostly dependent on rice, if the price of rice goes up, reducing real income, then budget cuts will be made in other items (less meat) rather than reducing the amount of rice bought. With more of the budget devoted to rice, more rice will be bought. This is still an income effect…the real income falls (due to a rise in the price of rice) so more of the inferior good is bought because it’s still cheaper than substitutes.
I didn’t even think of it until you mentioned it, actually. I knew there was something screwy with msmith’s definition, but couldn’t put my finger on it…it’s been a few years since I’ve dealt with anything other than labor economics.
Lumpy does have this much of a point: a supermarket (any retailer, really) has limited shelf space and a motive for increasing the profit margin on any item it can. Retailers will swap item A for item B on their shelves, if they expect the B will sell as well as A, and B is cheaper for them to buy, thus increasing their margins. Heinz Tomato Paste may be replaced with Hunt’s Tomato Paste since Hunt’s is a little cheaper, and the buyer for the supermarket doesn’t really expect anyone to buy the Heinz but not the Hunt’s.
To that extent, the law of supply and demand doesn’t apply; in other words, it doesn’t apply in this case to specific brands, only to types of products. This doesn’t make a mockery of free markets, only limits its application to more general cases.
