When I took Introduction to Marketing, my professor told us that people walk around with shopping lists in their minds. A person says, "If I ever get the money, I will buy . . . ." Then the person names the things on the list: a new car, a boat, a tropical vacation, new dress shoes, a house, and so on. But what if our hypothetical person suddenly came into money through an inheritance or a lottery or big bonus? Our lucky shopper would start buying things on the mental list. And what do you think? Once all the items on the list have been purchased, Super Shopper will be done shopping forever, right?
Of course not. In general, on average, people are never satisfied. Sure, there are some saints on earth who do not crave more goods, but most people have insatiable wants. Notice that I am using the word wants, not needs. Once the lucky shopper buys everything on the mental list, new wants replace the old ones.
Now, a secret. In economics, everything comes in two's. For example, economists make two assumptions about human economic behavior. One assumption is the existence of insatiable wants. The other assumption is related to the definition of market. A buyer and seller come together and make a trade. Product moves in one direction and resources—usually money—move in the other. We have infinite wants, but we also learn at an early age that we cannot have everything we want. There are not enough resources—for example, money—to spend in order to satisfy our infinite wants. Resources are scarce, finite.
So, in general, on average, our wants are infinite, but our resources are scarce.
There are two main examples of scarce resources. Why two? Because in economics, everything comes in two's! One example of a scarce resource is labor, human resources. At any one moment in time, there is a finite number of workers on earth. These workers can produce goods and services, but not enough to satisfy infinite wants.
The other example of a scarce resource is capital. In economics, the word capital means the physical things we use to make stuff. A factory building, an airplane, an office computer are examples of capital equipment. Again, at any given moment in time, there is a finite amount of capital equipment. There is never enough capital to be used to satisfy infinite wants.
What does it mean that we have infinite wants, but scarce resources? It means that we are forced to make choices. We cannot have it all. Instead, we must prioritize which of our infinite wants we will satisfy and which we will sacrifice. As a matter of fact, you already understand the idea that the central economic behavior is making choices. Imagine that, when you go to buy groceries one week, you have less money to spend than usual. As you walk into the store, you say to yourself, "This week I am going to have to economize." You know that you cannot afford to buy everything that you usually buy, so you will have to set priorities. You will have to make choices.
This is what economics is all about, making choices and tradeoffs.. Consumers have to make economic choices. So do managers and so do societies.
Economics scientifically studies choice-making behavior. What do people consider when making their choices? Can we predict what choices people will make?
Keep reading.
COPYRIGHT © 2008 by Robert D. Sandman
ALL RIGHTS RESERVED.
Wednesday, November 19, 2008
Monday, November 3, 2008
Meditate at Lunch
Think for a moment about the last lunch you had. What did you eat? For me it was some pulled pork with barbecue sauce. I made a sandwhich with two pieces of sliced white bread. I also had a golden delicious apple, potato chips, and a glass of milk.
Here is a question. Where did the parts of my lunch come from? The pork and sauce came from a local restaurant. The bread, apple, chips, and milk came from the grocery store. When we purchased the pork or the groceries, we were the buyers. The restaurant or the grocery store were the sellers, who handed the food over. But there's no such thing as a free lunch, right?
In order to take the food, we had to pay money. There at the checkout register, a trade was made. Food flowed from the seller to the buyer and money flowed in the other direction. This is what a market is, a place where buyers and sellers come together and make a trade.
But where did the restaurant get the pork? Probably from a wholesale restaurant food distributor. And notice a subtle shift. The distributor is the seller. Now the restaurant is the buyer. Most people and organizations in the economy play this double role, both buyer and seller. You are a buyer when you are a customer in a store. You are a seller of your labor to your employer. Your organization acts as a buyer through its purchasing department and as a seller through its sales and marketing departments.
In any event, the restaurant buyer and the distributor seller came together and made a trade. The restaurant might have issued a purchase order for a delivery of some number of pounds of pork every few days. After the delivery, the distributor's accounts receivable department sent an invoice to the restaurant. Later, the restaurant's accounts payable department sent a check to the distributor. Buyer and seller came together and made a trade. Food moved from the distributor to the restaurant and money moved the other way.
The wholesale distributor purchased the pork from a processor. Now the distributor was the buyer. In the market, pork moved from the processor to the distributor and money flowed from the distributor to the processor. In a similar way, the processor acted as a buyer and hog farmers acted as sellers.
The pork traveled through a long, complicated supply chain in order to be available in the restaurant when we were ready to purchase it. At every stage in the supply chain, buyers and sellers came together and made a trade. We could describe the same process for the bread that I used to make my sandwich, the apple, the potato chips, and the milk. The food that you ate yesterday and the meals for all the people reading this blog also were delivered by similar supply chains. Same thing for the clothes you are wearing or the computer you are using.
Now comes the miracle of economics, the kind of astounding insight that turned me into an economics jerk. There is no government official or corporate headquarters coordinating all these supply chains and making them work to deliver the products that we want to consume. The supply chains work all by themselves because buyers at each stage are motivated to buy products and sellers are motivated to earn money. This is what the concept of the Invisible Hand is all about.
Imagine for a moment that you are point of light floating in space. Now imagine that the companies from which you purchase goods and services are also floating points of light. Your market trades with them are beams of light connecting you to them. But each of those selling companies also purchase; so, they are connected by beams to many other points of light. Keep going and eventually you can visualize an enormous ball of points of light with many, many beams connecting them in a complicated web.
This connectivity illustrates the Basic Economic Truth: Everything is connected to everything else. So there is something to think about at your next meal. Where did your food come from? What steps did it go through to get to you? How many times did buyers and sellers make a trade? And then tell your friends and family what you're thinking. You'll be an economics jerk!
__________________________
COPYRIGHT © 2008 by Robert D. Sandman
ALL RIGHTS RESERVED.
Here is a question. Where did the parts of my lunch come from? The pork and sauce came from a local restaurant. The bread, apple, chips, and milk came from the grocery store. When we purchased the pork or the groceries, we were the buyers. The restaurant or the grocery store were the sellers, who handed the food over. But there's no such thing as a free lunch, right?
In order to take the food, we had to pay money. There at the checkout register, a trade was made. Food flowed from the seller to the buyer and money flowed in the other direction. This is what a market is, a place where buyers and sellers come together and make a trade.
But where did the restaurant get the pork? Probably from a wholesale restaurant food distributor. And notice a subtle shift. The distributor is the seller. Now the restaurant is the buyer. Most people and organizations in the economy play this double role, both buyer and seller. You are a buyer when you are a customer in a store. You are a seller of your labor to your employer. Your organization acts as a buyer through its purchasing department and as a seller through its sales and marketing departments.
In any event, the restaurant buyer and the distributor seller came together and made a trade. The restaurant might have issued a purchase order for a delivery of some number of pounds of pork every few days. After the delivery, the distributor's accounts receivable department sent an invoice to the restaurant. Later, the restaurant's accounts payable department sent a check to the distributor. Buyer and seller came together and made a trade. Food moved from the distributor to the restaurant and money moved the other way.
The wholesale distributor purchased the pork from a processor. Now the distributor was the buyer. In the market, pork moved from the processor to the distributor and money flowed from the distributor to the processor. In a similar way, the processor acted as a buyer and hog farmers acted as sellers.
The pork traveled through a long, complicated supply chain in order to be available in the restaurant when we were ready to purchase it. At every stage in the supply chain, buyers and sellers came together and made a trade. We could describe the same process for the bread that I used to make my sandwich, the apple, the potato chips, and the milk. The food that you ate yesterday and the meals for all the people reading this blog also were delivered by similar supply chains. Same thing for the clothes you are wearing or the computer you are using.
Now comes the miracle of economics, the kind of astounding insight that turned me into an economics jerk. There is no government official or corporate headquarters coordinating all these supply chains and making them work to deliver the products that we want to consume. The supply chains work all by themselves because buyers at each stage are motivated to buy products and sellers are motivated to earn money. This is what the concept of the Invisible Hand is all about.
Imagine for a moment that you are point of light floating in space. Now imagine that the companies from which you purchase goods and services are also floating points of light. Your market trades with them are beams of light connecting you to them. But each of those selling companies also purchase; so, they are connected by beams to many other points of light. Keep going and eventually you can visualize an enormous ball of points of light with many, many beams connecting them in a complicated web.
This connectivity illustrates the Basic Economic Truth: Everything is connected to everything else. So there is something to think about at your next meal. Where did your food come from? What steps did it go through to get to you? How many times did buyers and sellers make a trade? And then tell your friends and family what you're thinking. You'll be an economics jerk!
__________________________
COPYRIGHT © 2008 by Robert D. Sandman
ALL RIGHTS RESERVED.
Subscribe to:
Posts (Atom)