Free Enterprise - Principle 12

Principle 12: Supply and demand in the market place determines what goods/services are offered and what their price will be.

People know what they want to buy and how much they are willing to pay for it. In a free market the government has little influence on what is sold and how much it sells for. Instead, the people say, by how much money they spend and what they spend their money for.

The football in the drawing is valuable to some people. Is it valuable to everyone? If a company makes one hundred computers and only one person wants to buy a computer, will the company keep making computers? A twelve year old boy really wants a skate board. A store near a junior high school might do well selling skateboards? Would the gift shop in a senior citizens home have much demand for skate boards?

For example, if people want a special soap, some company will make that special soap and sell it to the public. We say there is a big demand when many people want it. As long as people keep buying that soap, the company will continue to make it. If interest drops and people stop buying in large amounts, a lot of unsold soap will stack up on the store shelves! There is an oversupply because demand fell so low. We have low demand/over supply condition. If demand ever gets so low that only a very few are buying the soap the company will stop making it altogether.

What the people demand, not what the government thinks, determines what is produced. Let’s suppose there is a demand for the soap, but the supply is low. People can hardly find the soap—and when they do, since it is in short supply, they will pay a high price for it. This is a high demand/low supply condition. It drives the price up. Seeing a chance to make money, new companies will decide to make and supply the soap. If too many companies make the soap, there will be a large supply of soap and merchants will have to lower the price to get people to buy it now. To get rid of their stockpile of soap, companies start competing fiercely to see how fast they can get their oversupply of soap sold. The price can drop dramatically overnight!

If there is a demand, someone will make sure there is a supply. If there is no demand, no one will provide a supply. This is free market in operation.

Story

Kovrich warned his buddies. He told them they would have to work hard and try to make the owners successful.

“That way,” he explained, “as long as people need huts, and Andre and Allen can build them for sale at competitive prices, we have jobs! It’s a team thing really—everybody needs to win! When huts have a good reputation, and with our quality workmanship we can guarantee that it does, kids will want to buy. If the company can build them cheap enough and still make a profit—the business will expand. Not only will our jobs be safe, we bring on our friends too! When the company wins, we workers win too!”

“It is simple, really,” he told his buddies. “If there is a demand for something, someone will produce it and sell it. And if there is a lot of money to be made, then many people will jump into the business of producing it. If too many jump in, then too much of the product will be on the market and the price will drop..”

He went on. “We are not slaves, but we have to make this business work. We need to do good quality work, at a reasonable wage, so the customer gets a good deal. When we are efficient like this, no other company can touch us. Our business will dominate the market, and we will have jobs forever.”

He knew he would have to keep his people producing. And he also knew that when they had proven themselves, made the owners money and people loved their huts and felt like they got a good deal on the price, there would be a demand for huts for a long time. That meant that their jobs would secure for a long time also.

Then he would go to Andre and Allen and negotiate a wage increase. At least some of the profits Allen and Andre would be stacking up by then would have to go for rewarding the workers. Without the entrepreneurs taking a big risk, there would be no new jobs. But the opposite was also true. Without workers, working at a competitive wage, the entrepreneurs would have no new business in which to make money!

“Thank God for competition,” Sabetha told Marcella. “It keeps efficiency in the hut building business. Competition forces builders to produce goods that work well – that can count on to work. Nobody wants to buy items that don’t work.. Competition also holds prices down. That in turn is an encouragement to future sales—and that bodes well for this part of the economy for a long time to come.” She knew competition was healthy for their little economy—it gave quality goods at reasonable prices.

Activity: Use the store “A” and store “B” model again. Teacher can guide the process; announce new conditions, etc. in order to make the various points of this principle.

Possible scenarios:

1) Have a shopper student go to store “A” and ask for “Fantastic Beauty” soap. They don’t have it so she goes to store “B” and they don’t have it. She throws up her hands in despair! “I would pay anything for a bar of “Fantastic Beauty” soap. (Teacher: urge store “B” to go find a supply of the precious soap. They can put a high price on it because no one else has the soap for sale!) Have a few other shopper students go to store “B” and pay the high price for the precious soap. Word spreads—many shoppers go to store “B” for the soap

2) Have store “A” find out about the soap which is in such high demand—they go get a supply of “Fantastic Beauty” soap also! They want to be competitive, so they sell it a little cheaper than does store “B”. Will store “B” lower its price to match or under sell store “A”?

3) Then announce that a new factory is making the soap—several thousand bars each day! Ask the class what will happen to the price of the once hard to find soap. (Ready supply, maybe over supply and the price will go down.)

4) New development! A reputable research company comes out with the report that “Fantastic Beauty” soap may cause skin cancer in adults and it often makes children sick. Ask the class: “Will people still want it? Will there be any demand for it at all?”

5) Have the original shopper student announce that she has found a wonderful skin cream from a far away country that makes her look much younger and gives her a lot of energy! Teacher points out: the demand for the soap is gone (bars of it lay unsold in the factory warehouse) and soon there will be a demand for the so called miracle skin cream. Ask the class: “Do you think, seeing the demand, someone locally will jump in and produce the skin cream?” Yes, someone will, because they see a chance to make a profit.

6) What products would come on the market if it was suddenly discovered that there were harmful contaminants in the wells that furnish the town’s drinking water? Would those products be cheaper at first and cost more later on, or the other way around? (They cost more at first because in the early days only a few purification products exist—high demand (because everyone wants one), low supply. They are cheaper later on as more companies add water purification products to their product line—increase in supply, demand stable, price lowers.)

7) Ask what would happen to supply and demand if the government suddenly found a cheap way to get rid of the contaminants and there was no longer a need for home water purification products. (Over supply, no demand—products valueless.)

Conclude with: “In a free market, demand determines what is produced—if people want it, someone will produce it.” Also, “In a free market, supply determines how much people will pay for a good or service—scarcity items command high price, over supply items are lucky to get sold at all.”

The people, not the government, determine what is produced and how much they will pay for it.