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The fallacy is you stating something that's just plain wrong. The basic law of economics is that price is determined by BOTH supply and demand, whereas your sta

by Kranar 5y ago

The fallacy is you stating something that's just plain wrong. The basic law of economics is that price is determined by BOTH supply and demand, whereas your statement is that price is determined only by demand. The cost to manufacture a product is one of the key components that determines the supply of a product; the higher the cost to produce, the lower the supply and hence assuming demand doesn't change then the price will increase. Of course demand may not stay the same, could increase or decrease.

garbagetime 5y ago
I think the point he was making is that change in supply doesn't necessarily lead to a change in price. I don't know if that's what they teach in basic economic s, but it's certainly true.
- Kranar 5y ago
  The post I replied to doesn't mention supply either directly or indirectly, rather it states the following: "[prices are] driven only by how much people are willing to pay." Emphasis theirs. That statement is false, prices are a function of both supply and demand and supply is a function of manufacturing costs. The cheaper something is to produce, the more of it one can produce and hence the greater the supply.
  - OJFord 5y ago
    I think that quote is fine if you read 'how much people are willing to pay' as meaning the whole order book (as it were) - i.e. how many people are willing to pay how much. The price is usually (an attempt at) optimising profit, where that may mean selling for more dollars to fewer people. Ceteris paribus a reduction in the cost of supply doesn't change that calculation. (Though, as the economist in my family says, 'ceteris never bloody is paribus'!)
    - Dylan16807 5y ago
      > I think that quote is fine if you read 'how much people are willing to pay' as meaning the whole order book (as it were) - i.e. how many people are willing to pay how much. It's really not though. If I give you the full detailed order book of a secret product and ask you to set the price we should use as a company, you won't be able to do it. You need at least a rough idea of the production cost first. If people will buy 10x as much at $100 compared to $200, then we should probably price at $100 if our cost is $40, and we should definitely not price at $100 if our cost is $120. If you want to set a price off of one data lump, you need to replace the revenue numbers in that order book with margin per unit.
      - OJFord 5y ago
        Yes, true, I suppose I'm assuming a pre-existing/otherwise somehow known wide margin. The optimisation I describe is on profit, not revenue, and (as you say) you need to know the fixed and variable (marginal unit) costs to do that.
  - ncmncm 5y ago
    If people don't need it, they may simply choose not to buy.
  - jjeaff 5y ago
    A more accurate statement might be: prices are upper bounded by what people are willing to pay.
  - drugstorecowboy 5y ago
    The cheaper something is to produce, the more of it one can produce and hence the greater the supply. This only affects the price if there are competitors. If I want a widget, the total supply of widgets is irrelevant. For example Insulin, the fact that you have tons more of it won't make the price go down, you have it and I need it. You can sell it for whatever I am willing to pay irrespective of supply or production costs.
  - pyrale 5y ago
    > The post I replied to doesn't mention supply either directly or indirectly The post you replied to doesn't mention demand either. It only talks about price. There is a difference between demand and price, and there is no generic function from price to demand. Even such basic assumptions as "demand falls as price goes up" fail in some situations.
- bko 5y ago
  All else being equal, a change in supply will change the price, except in perfectly elastic demand, in which case less would just be sold at the same price. Sure not everything is always equal, but the relationship is clear
Spooky23 5y ago
The point of Arizona iced tea is volume sales, and they maintain or increase that volume by pricing under Coke/Pepsi. Bigger can, smaller dollars. That business is all about scale. They probably make more per unit than coke as they spend zero dollars on marketing. I did this with an email service. We had runway and sold at 30% under cost. After about two years in our little niche, we had pushed enough volume that we were making a healthy profit. Then we sold the business to a bigger fish.
thwayunion 5y ago
> The basic law of economics It's not a law. It's a model. A very simple model. Of a very complex system. Computer Scientists never invoke Turing machines or the simply typed lambda calculus in debates about specific pieces of hardware or compiler implementations, except in cases where those models are actually applicable and in ways that comport with the pieces of those systems for which the model is usefully faithful. The Econ 101 "supply & demand curve" is way simpler than TMs/lambda calculi, AND it's modeling a much more complex system than a computer/compiler. Yet, somehow, the model is constantly invoked. There's a really good reason that every single financial analyst in the world goes directly to "pricing power" whenever they are asked to analyze the effect of "supply chains".
- mannerheim 5y ago
  GGP said the price is only determined by how much people are willing to pay. This is obviously false. If the cost of producing a product rises above the current price, even if the price people are willing to pay doesn't change, the price has to increase or else the business will start losing money.
  - ncmncm 5y ago
    And, sometimes the business starts losing money. We saw that when oil prices went below many producers' extraction cost. They continued selling at the lower price, because they had to service existing debt, and accumulated more debt until the price went back up.
    - skeeter2020 5y ago
      This is also known as the "Groupon Business Model of Imminent Failure". Cash today is way more important than accounts receivable.
    - Ekaros 5y ago
      Also sometimes supply or production is inelastic and not possible to scale down and up. Thus to have chance to generate money in future they had to accept loss now.
LeifCarrotson 5y ago
That's what basic economics theory says, yes, but not what happens in practice to make Arizona Iced Tea $0.99. Nor why a baggie of 5 screws at Lowes costs $2.99. Supplier costs are important in commodities, especially where easily compared alternatives are readily available, but that's not true of all products. There are a lot of factors that go into pricing, but for many consumer goods the vendor is able to set prices pretty much independently of the costs.
- brimble 5y ago
  > Nor why a baggie of 5 screws at Lowes costs $2.99 Indeed—and one might well see that price remain stable even if the cost of producing the screws doubled, because the margin's already insanely high.
kube-system 5y ago
The supply curve you are thinking about exists when you are talking about a market with multiple suppliers. If we’re discussing a single product from one supplier, the supply curve becomes a vertical line.
- colinmhayes 5y ago
  No it doesn't... You don't think Arizona Iced tea would produce more cans if everyone started wanting them for $2? Marginal costs increase as the company expands due to bureaucracy.
  - kube-system 5y ago
    Arizona will sell you as many cans as you want, and as many as they can supply, at their asking price. Their overhead costs per unit decrease as a company grows. The increase as you travel right on a supply curve represents the entry of more participants offering supply. You can think of a supply demand curve like a bunch of dots, representing different suppliers asking prices. Imagine you’re graphing a bid/offer spread chart for a stock. Arizona’s product offering is a single “offer”.
    - colinmhayes 5y ago
      > Overhead costs per unit decrease as a company grows. This is correct to an extent, at Arizona's size it is wrong. It would cost them a lot to increase production.
      - kube-system 5y ago
        Sure, technically speaking, it’s not an infinitely vertical line, it has an lower and upper terminus, and might begin again at another y value. But we’re already misusing the model to begin with. The line is intended to represent multiple suppliers participating in a market for a good with a fungible source. It is not and never has been a model for pricing decisions at a single company.
CraigJPerry 5y ago
>> price is determined by BOTH supply and demand Most of economics teaching is about exploring just how wildly wrong econ101 is. E.g. who passes on insulin since the last price increase? E.g. why does a basic black and white rolex daytona cost around £12k at an authorized dealer? (For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more)
- akavi 5y ago
  People certainly pass on specific kinds of insulin when their price increases. Note that the "old" kind of insulin is available for 25 $/vial. It sucks in a lot of ways (requires more frequent dosage, and has a smaller margin of error), but it is dramatically cheaper than the newer and better kinds. So financially strapped diabetics do have a trade off available to them.
- WalterBright 5y ago
  > why does a basic black and white rolex daytona cost around £12k at an authorized dealer? Because they're buying a status symbol, not a watch. > For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more An excellent demonstration of Supply&Demand at work. Your example doesn't refute S&D at all :-)
  - CraigJPerry 5y ago
    >>> the sticker price has nothing to do with the cost of materials; it’s driven only by how much people are willing to pay >> why does a basic black and white rolex daytona cost around £12k at an authorized dealer? > Because they're buying a status symbol, not a watch QED?
  - xzel 5y ago
    This is why the other poster got frustrated with you. The current watch market is a terrible example of supply and demand as a traditional model. Do you think S&D effectively models NFT marketplace? Because the watch market is a lot more like that, too complex to be models effectively by traditional S&D. Source: am a reseller.
tj-teej 5y ago
"The basic law of economics is that price is determined by BOTH supply and demand" That is one basic law of economics, but in some markets price isn't only determined by supply and demand. I think a similar/analogous example for the price on the can is minimum wage. Yes, in a lot of cases wages are set by the intersection of supply and demand, but if that intersection is below a minimum wage then the "price" of labor (the wage) is the minimum wage. Now there's economic implications of that too, but at the end of the day in the US you can't pay a McDonalds employee $2 an hour and a corner store can't sell an Arizona tea for $2.
hedora 5y ago
Arizona Iced Tea's unit per-economics are closer to software than to food. They both have ridiculously high incremental profit margins, so talking about finite supplies doesn't make sense.
- KptMarchewa 5y ago
  If you're talking about actual drinkable content, then yes. The majority of the costs are in packaging and logistics - and those are getting expensive.
shalmanese 5y ago
That law of economics applies to a market of products and assumes that supply decreases as additional manufacturers of the product find it less profitable at a given price and drop out of the market. When applied to a single consumer packaged good product, the supply curve is 0 at a point below the manufacturing cost and then rises to infinite at some point shortly above that price. eg: If I an providing dollar bills and it costs 10 cents for me ship one to you, I will sell you an infinite quantity of them if you're willing to buy them at $1.11. Coca Cola's willingness to supply Coke at $2 is infinite, if demand doubled overnight, CC would build whatever factories it needs to meet that demand and would do it for each successive doubling until it started hitting material planetary constraints like consuming all of the world's sugar.
spoonjim 5y ago
Yes but in a modern industrialized economy if there is a profit to be had the supply will create itself, without barriers to entry. However in beverages there is a big barrier to entry in consumer brand awareness and in retail shelf space especially for refrigerated products.

by Kranar 5y ago

garbagetime 5y ago

I think the point he was making is that change in supply doesn't necessarily lead to a change in price. I don't know if that's what they teach in basic economic s, but it's certainly true.

Kranar 5y ago
The post I replied to doesn't mention supply either directly or indirectly, rather it states the following: "[prices are] driven only by how much people are willing to pay." Emphasis theirs. That statement is false, prices are a function of both supply and demand and supply is a function of manufacturing costs. The cheaper something is to produce, the more of it one can produce and hence the greater the supply.
- OJFord 5y ago
  I think that quote is fine if you read 'how much people are willing to pay' as meaning the whole order book (as it were) - i.e. how many people are willing to pay how much. The price is usually (an attempt at) optimising profit, where that may mean selling for more dollars to fewer people. Ceteris paribus a reduction in the cost of supply doesn't change that calculation. (Though, as the economist in my family says, 'ceteris never bloody is paribus'!)
  - Dylan16807 5y ago
    > I think that quote is fine if you read 'how much people are willing to pay' as meaning the whole order book (as it were) - i.e. how many people are willing to pay how much. It's really not though. If I give you the full detailed order book of a secret product and ask you to set the price we should use as a company, you won't be able to do it. You need at least a rough idea of the production cost first. If people will buy 10x as much at $100 compared to $200, then we should probably price at $100 if our cost is $40, and we should definitely not price at $100 if our cost is $120. If you want to set a price off of one data lump, you need to replace the revenue numbers in that order book with margin per unit.
    - OJFord 5y ago
      Yes, true, I suppose I'm assuming a pre-existing/otherwise somehow known wide margin. The optimisation I describe is on profit, not revenue, and (as you say) you need to know the fixed and variable (marginal unit) costs to do that.
- ncmncm 5y ago
  If people don't need it, they may simply choose not to buy.
- jjeaff 5y ago
  A more accurate statement might be: prices are upper bounded by what people are willing to pay.
- drugstorecowboy 5y ago
  The cheaper something is to produce, the more of it one can produce and hence the greater the supply. This only affects the price if there are competitors. If I want a widget, the total supply of widgets is irrelevant. For example Insulin, the fact that you have tons more of it won't make the price go down, you have it and I need it. You can sell it for whatever I am willing to pay irrespective of supply or production costs.
- pyrale 5y ago
  > The post I replied to doesn't mention supply either directly or indirectly The post you replied to doesn't mention demand either. It only talks about price. There is a difference between demand and price, and there is no generic function from price to demand. Even such basic assumptions as "demand falls as price goes up" fail in some situations.
bko 5y ago
All else being equal, a change in supply will change the price, except in perfectly elastic demand, in which case less would just be sold at the same price. Sure not everything is always equal, but the relationship is clear

Spooky23 5y ago

The point of Arizona iced tea is volume sales, and they maintain or increase that volume by pricing under Coke/Pepsi. Bigger can, smaller dollars. That business is all about scale. They probably make more per unit than coke as they spend zero dollars on marketing. I did this with an email service. We had runway and sold at 30% under cost. After about two years in our little niche, we had pushed enough volume that we were making a healthy profit. Then we sold the business to a bigger fish.

thwayunion 5y ago

> The basic law of economics It's not a law. It's a model. A very simple model. Of a very complex system. Computer Scientists never invoke Turing machines or the simply typed lambda calculus in debates about specific pieces of hardware or compiler implementations, except in cases where those models are actually applicable and in ways that comport with the pieces of those systems for which the model is usefully faithful. The Econ 101 "supply & demand curve" is way simpler than TMs/lambda calculi, AND it's modeling a much more complex system than a computer/compiler. Yet, somehow, the model is constantly invoked. There's a really good reason that every single financial analyst in the world goes directly to "pricing power" whenever they are asked to analyze the effect of "supply chains".

mannerheim 5y ago
GGP said the price is only determined by how much people are willing to pay. This is obviously false. If the cost of producing a product rises above the current price, even if the price people are willing to pay doesn't change, the price has to increase or else the business will start losing money.
- ncmncm 5y ago
  And, sometimes the business starts losing money. We saw that when oil prices went below many producers' extraction cost. They continued selling at the lower price, because they had to service existing debt, and accumulated more debt until the price went back up.
  - skeeter2020 5y ago
    This is also known as the "Groupon Business Model of Imminent Failure". Cash today is way more important than accounts receivable.
  - Ekaros 5y ago
    Also sometimes supply or production is inelastic and not possible to scale down and up. Thus to have chance to generate money in future they had to accept loss now.

LeifCarrotson 5y ago

That's what basic economics theory says, yes, but not what happens in practice to make Arizona Iced Tea $0.99. Nor why a baggie of 5 screws at Lowes costs $2.99. Supplier costs are important in commodities, especially where easily compared alternatives are readily available, but that's not true of all products. There are a lot of factors that go into pricing, but for many consumer goods the vendor is able to set prices pretty much independently of the costs.

brimble 5y ago
> Nor why a baggie of 5 screws at Lowes costs $2.99 Indeed—and one might well see that price remain stable even if the cost of producing the screws doubled, because the margin's already insanely high.

kube-system 5y ago

The supply curve you are thinking about exists when you are talking about a market with multiple suppliers. If we’re discussing a single product from one supplier, the supply curve becomes a vertical line.

colinmhayes 5y ago
No it doesn't... You don't think Arizona Iced tea would produce more cans if everyone started wanting them for $2? Marginal costs increase as the company expands due to bureaucracy.
- kube-system 5y ago
  Arizona will sell you as many cans as you want, and as many as they can supply, at their asking price. Their overhead costs per unit decrease as a company grows. The increase as you travel right on a supply curve represents the entry of more participants offering supply. You can think of a supply demand curve like a bunch of dots, representing different suppliers asking prices. Imagine you’re graphing a bid/offer spread chart for a stock. Arizona’s product offering is a single “offer”.
  - colinmhayes 5y ago
    > Overhead costs per unit decrease as a company grows. This is correct to an extent, at Arizona's size it is wrong. It would cost them a lot to increase production.
    - kube-system 5y ago
      Sure, technically speaking, it’s not an infinitely vertical line, it has an lower and upper terminus, and might begin again at another y value. But we’re already misusing the model to begin with. The line is intended to represent multiple suppliers participating in a market for a good with a fungible source. It is not and never has been a model for pricing decisions at a single company.

CraigJPerry 5y ago

>> price is determined by BOTH supply and demand Most of economics teaching is about exploring just how wildly wrong econ101 is. E.g. who passes on insulin since the last price increase? E.g. why does a basic black and white rolex daytona cost around £12k at an authorized dealer? (For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more)

akavi 5y ago
People certainly pass on specific kinds of insulin when their price increases. Note that the "old" kind of insulin is available for 25 $/vial. It sucks in a lot of ways (requires more frequent dosage, and has a smaller margin of error), but it is dramatically cheaper than the newer and better kinds. So financially strapped diabetics do have a trade off available to them.
WalterBright 5y ago
> why does a basic black and white rolex daytona cost around £12k at an authorized dealer? Because they're buying a status symbol, not a watch. > For non-watch people there’s a 10 year wait list to buy at that price but you can buy 2nd hand immediately for a LOT more An excellent demonstration of Supply&Demand at work. Your example doesn't refute S&D at all :-)
- CraigJPerry 5y ago
  >>> the sticker price has nothing to do with the cost of materials; it’s driven only by how much people are willing to pay >> why does a basic black and white rolex daytona cost around £12k at an authorized dealer? > Because they're buying a status symbol, not a watch QED?
- xzel 5y ago
  This is why the other poster got frustrated with you. The current watch market is a terrible example of supply and demand as a traditional model. Do you think S&D effectively models NFT marketplace? Because the watch market is a lot more like that, too complex to be models effectively by traditional S&D. Source: am a reseller.

tj-teej 5y ago

"The basic law of economics is that price is determined by BOTH supply and demand" That is one basic law of economics, but in some markets price isn't only determined by supply and demand. I think a similar/analogous example for the price on the can is minimum wage. Yes, in a lot of cases wages are set by the intersection of supply and demand, but if that intersection is below a minimum wage then the "price" of labor (the wage) is the minimum wage. Now there's economic implications of that too, but at the end of the day in the US you can't pay a McDonalds employee $2 an hour and a corner store can't sell an Arizona tea for $2.

hedora 5y ago

Arizona Iced Tea's unit per-economics are closer to software than to food. They both have ridiculously high incremental profit margins, so talking about finite supplies doesn't make sense.

KptMarchewa 5y ago
If you're talking about actual drinkable content, then yes. The majority of the costs are in packaging and logistics - and those are getting expensive.

shalmanese 5y ago

That law of economics applies to a market of products and assumes that supply decreases as additional manufacturers of the product find it less profitable at a given price and drop out of the market. When applied to a single consumer packaged good product, the supply curve is 0 at a point below the manufacturing cost and then rises to infinite at some point shortly above that price. eg: If I an providing dollar bills and it costs 10 cents for me ship one to you, I will sell you an infinite quantity of them if you're willing to buy them at $1.11. Coca Cola's willingness to supply Coke at $2 is infinite, if demand doubled overnight, CC would build whatever factories it needs to meet that demand and would do it for each successive doubling until it started hitting material planetary constraints like consuming all of the world's sugar.

spoonjim 5y ago

Yes but in a modern industrialized economy if there is a profit to be had the supply will create itself, without barriers to entry. However in beverages there is a big barrier to entry in consumer brand awareness and in retail shelf space especially for refrigerated products.