Tuesday, May 27, 2008
Sippican's Snappy Elastic Pricing Synopsis
You don't understand economics very well.
No offense. I don't know who you are, but I'm willing to defame you like that. Why do you suppose that is? It's because nobody understands economics very well in my experience. When I see the poll question "Which candidate for President do you trust more to run the economy?" it's the question itself which bugs me, not the percentages assigned to the candidates. If you'd ask or answer that question, you have a pre-civilized view of economics in my opinion.
I'm not educated in economics, so I know a little about it. If I was educated, I'd know about an economics education. Not the same thing. I learned what I know about economics by getting the treatment a baby gives a diaper every day out in the economic landscape. You're not allowed to indulge in fantasy very long out here. You can do it for a lifetime in a college. And beyond, if you can get published.
I want to talk about price elasticity, because it interests me. It refers to the relationship between the supply and demand for things as you tinker with price, or supply, or a host of other factors.
In general, people who work with their hands seek price inelasticity. That means that demand falls more slowly than an increase in price. Since the amount of work a person can do is finite you want to raise your price to perform the work without decreasing demand too much by doing so. You work less for more money.
If demand is elastic, this means if you raise your price, the demand falls, and doesn't make up for the increased price. You raise your prices but you make less money.
If it's unit elastic, there's a direct correlation between price and demand. Raise the price, demand goes down exactly the amount necessary so that revenue stays the same. An accountant is the only person to have ever seen this creature.
Now let's go out on the economic map where navigators used to see "Here Be Monsters."
Perfectly elastic pricing is where if you raise the price one iota, the demand drops to zero.
And finally, if we talk of demand being perfectly inelastic, no matter what you charge, the demand stays the same. You've got a crack stand in Marion Barry's living room.
Now I want you to come out to the edge of the map where I live, and have lived for the vast majority of my life. Forget inelastic price, elastic price, and the unicorn of economists, unit elastic demand. Those are just things that determine whether you'll buy a flatscreen TV or an end table or not. I want to get existential on you.
If you have a sinecure, you will never understand what it is to be in a walk of life where demand for your production risks perfect elasticity. You simply talk about the churn in the economy. No sympathy for those buggy-whip manufacturers. They should have been smart and got a job collecting tolls on the highway and then they wouldn't have found themselves in that pickle. People with whales on their pants who refer to their significant other as "Lovie" like this line of reasoning a lot, too.
People often tell me that my furniture is very inexpensive for what you get. Raise your prices, they counsel. Maybe. But more likely, they don't understand that the market often doesn't make such fine distinctions about your pricing structure. Sometimes it's pass/fail. I have to be careful never to hit the fail point because there's no readjustment period. You're just dead. People with straightforward jobs can picture this best by imagining that if you went into you boss's office and demanded a raise, the only two answers are: "Sure!" and "You're fired!". You'd be less extravagant in your demands then, wouldn't you?
What about the political angle I mentioned earlier? Oh, that's where perfect inelasticity comes in. See, you don't understand it, because if you answered the poll question above, you think the government is the producer in this scenario. You think they produce prosperity, and through some jiggery-pokery with inelastic set-asides, or elastic statutes, or unit elastic Smoot-Hawley tarrifs or raging carpet-bombing wars, they're going to arrange for the shelves in the US Store to be stocked with goodies for you. But you've got it exactly backwards.
The example often used for perfect inelasticity is the human heart transplant. If heart transplants were ten dollars, you wouldn't want one just because it was cheap, and if it cost eleventy-billion dollars, but you needed one, you wouldn't care what it costs. You'd beg, borrow, or steal the dough to get it.
So in the real world with the government in the picture, I am the good or service. But the United States Government is not a supermarket. It is a pawn shop. And I am born pawned, and I wake up every morning pawned. And if I want to get myself out of there, to work all day and try to make a few bucks so I can worry about something other than my very existence, I'm going to do whatever I'm told, and pay whatever is demanded of me. My interest in continuing to be me is 100%, and my demand to continue being me will not diminish no matter how abusive the situation you plunge me into.
My demand for me is perfectly inelastic, and the government knows it. Pay up, sucka.
The Mafia always understood perfect inelasticity, too. They'd come in, tell you how much protection money was required, and mentioned that your kneecaps were perfectly inelastic if you bent them backwards.