Supply and Demand

A cornerstone of the current money-driven economy is supply and demand, in a world where traditional concepts of money do not exist, how can supply and demand still exist? What will drive market growth?

The old way

Under capitalism, a product or service is put on the market and depending on how well made and/or how well marketed that product was, it may sell well or it may sell poorly. Products which sell well create demand for the product. The supplier then has to produce more of their product or service in order to meet the demand. If they can meet the demand easily then the market will become saturated, the demand will lessen and the supply will equal or be higher than the demand, thereby causing prices to drop. If the supplier cannot (or in some cases will not) scale up their business to increase supply then the demand may remain higher than the supply therefor causing prices to rise. Occasionally companies will increase the price of a product or service in order to purposefully lower demand.

Example:

Suzy decided she wanted to open a lemonade stand, she only has £3 but that was enough to buy ingredients to make 1 large jug of really good quality lemonade which would work out at about 10 cups. She put a price of £2 per cup and set up her stand. She had no customers at all, discouraged she decided to close her stand and go for a walk, around the corner she saw another stand which was charging £1.50 for lemonade and they were actually doing business!

She rushes back to her stand and drops the price to £1 per cup. She also promises her brother £2 to go around the street and tell people about her stand. Within 2 hours she had sold all of her lemonade.

The next day she does the same thing again, by the end of the first hour she had sold all of her lemonade, she rushed off to the shops and bought double the amount of ingredients, made the lemonade and managed to sell out again.

The next day she decides not to pay her brother to do any marketing and sure enough, she still manages to sell out, this time she had bought enough ingredients for 50 cups. Even without any marketing, the news of her high quality lemonade had spread and she was so busy that people were complaining that with the demand being so high, they were not able to get a cup of lemonade before she sold out. A few people said that they would pay extra if they could be guaranteed a cup of lemonade.

This gave Suzy an idea. The next day she bought two types of cups: red cups and blue cups. Both cups contained the same lemonade in them but the red cups were £2 and were in a ‘priority’ queue. Those willing to pay extra for the red cups would find that the demand on that side was low enough that they would be guaranteed a cup.

This is the engine behind capitalism and works pretty much exactly like this one every single level, from buying a loaf of bread to buying an island paradise. Even a countries currency uses the supply and demand concept. Without demand for it, a countries currency would be worthless.

The problem with this system is that it’s not balanced and often has nothing to do with quality of product or service, large companies can sell a sub-par product to the masses due to their exposure whilst a smaller company offering a much higher quality service cannot hope to compete. Thanks to the larger companies marketing budget and buying power it’s easy for them to shut the smaller companies out of the market whilst simultaneously reducing the quality of their own products.

News of Suzy’s lemonade stand spreads far and wide, other lemonade stands tried to open in the area but nobody could compete with Suzy as everyone already knew about her stand. The demand for her product continued to rise and constantly going to the store to buy ingredients and making the lemonade was becoming too time consuming.

One day Suzy decided that the people who were buying the blue cups were not paying enough for her lemonade anymore, so she decided to make a separate mixture for them which was heavily watered down but with extra sugar to hide the taste. A few customers complained that the flavour had changed and decided not to buy anymore, however for every customer she lost she managed to gain two due to her existing goodwill and the word of mouth marketing her customers were providing her. This system continued and within a few months, she had dropped the quality of both products several times and even managed to increase her prices, the red cups now sold for £2.50 each and the blue cups sold for £2. Because of the smaller price difference she found a lot more people bought red cups instead and eventually she stopped producing the blue cups altogether, she upped her prices and dropped the quality again and by this point, she had a constant supply of customers who were essentially paying £3 for a cup of sugary water.

At this point, demand was starting to trail off, she was losing goodwill and people didn’t like her high prices, another lemonade stand opened nearby which was charging £2 for a cup of good quality lemonade and they were starting to eat into Suzy’s market share. She decided to bring back the blue cups and keep the same mixture as the red cups but also create a new purple cup which was £4 a cup but contained the ingredients of the original lemonade recipe Suzy originally used.

She sold the blue cups for £1.50, thereby undercutting the market, other stands could not sell for that price as they could not buy lemons in the same quantities as Suzy as her success had a knock on effect and drove the price of lemons up in the area. Of course Suzy had a deal with the traders as she bought so many lemons at once, they gave her a great price. The purple cups were sold as ‘premium lemonade’ and customers who had grown used to the sugary water taste of her recent products were amazed at how tasty the ‘premium’ product was and many were more than happy to pay the extra for such a tasty product. The other customers flocked to the blue cups as it was cheaper than anything else on the market.

This was how things progressed, Suzy would keep tweaking the quality of her product to get the lowest possible quality that people would still buy and occasionally bringing out price promotions or bringing back old products (sometimes as a ‘limited edition’) in order to win back old customers and increase demand again. Her basic products would be produced so cheaply they could drastically undercut any of her competition and she was ensured a place at the top of the local lemonade stands.

Obviously this system only benefits the Suzy’s of the world, her customers and her competitors lose out and in the long term, this system can only result in sub-par products being delivered by a small number of big players whilst the little guys are left out in the cold. The worst part is that this system is a self-driving engine, all it would take to stall it is for enough customers to use their buying power to say “no, we won’t stand for this anymore” but they don’t. People have been indoctrinated by years of marketing into believing the hype of a product and have been convinced that they should trust brands and so they do, they give all of this power to a small number of people and that isn’t something that can be easily stopped.

I think the biggest problem is that our exposure to this concept for many generations has caused us to apply the economics of supply and demand to things which should never function using this method. The 2016 General Election is a prime example of this, Donald Trumps campaign was a lot of pomp and circumstance with virtually nothing behind him.

He wasn’t supplying anything at all, he was 100% marketing and yet many parts of the US still lapped it up as they (like all of us) have been groomed for generations to believe wholeheartedly in marketing, we are so indoctrinated in this now that many of us don’t even look at the product anymore, we just believe what we are sold.

The new way:

As mentioned above, the engine of supply and demand is difficult to stall, however if you take money out of the equation then suddenly everyone behaves differently.

If supply is government controlled and costs the business nothing, then there is no incentive to drop the quality of a product or service. If more staff are required to scale the business then they will be assigned, if more stock is required to meet demand, then that stock will be assigned.

In terms of demand, this is actually a lot easier to calculate. All transactions go through one central database as a transaction needs to be recorded in order to update the credit and grace allocations. If the system determines that demand is particularly high for a product in a specific area then more of that product will be allocated to the area until the demand normalises.

The incentive to grow will come from an increased Grace allocation to the business, growth will be achieved by producing high quality products or services. The more popular a product or service, the more people who use it and the bigger the business becomes.