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Some common economic questions Some common economic questions
by Joseph Gatt
2020-08-01 08:00:22
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Some provocative questions (and answers) economists and non-economists have pondered over the years.

Why are diamonds so expensive? Isn't it just a bunch of Jews trying to nickel and dime you?

The precious stone industry is an industry like any other. The world is full of rocks and stones, and you can pick those up for free in any mountain or sea front or cliff or other places.

econom00001_400For a stone to be considered precious, it has to be “pure.” Indeed, because of erosion most stones are in fact layers to quartz, clay, basalt, cobalt and other “dirt” elements.

Diamonds are considered pure stones, just like jades or emeralds. But diamonds are completely free of any residue of dust or dirt. So you're paying for the purity, for the purest of stones.

You're also paying for the “research and development” of the product. Diamonds in their pure form are “rocks” and you have people cutting them to turn them into gems. The cutting process is incredibly tedious and demands an incredible amount of precision, attention to detail and dexterity. One small mistake and the stone is “thrown away” and another one is cut. So you're paying for that.

Why is it mostly Orthodox Jews in the diamond cutting business? I'd think Orthodox Jews go through a process where they have to write at least one “perfect” copy of the Torah at least once in their life. That's 304,805 letters in total, and if you get one letter wrong, you have to start all over again.

To me, I'd use the following mathematical formula to determine the price of a product:

Price=raw materials and raw material extraction + machinery and product processing + labor + debt coverage + property + taxes + customer relations (including advertising) + research and development + transportation distribution costs + packaging costs + security and maintenance fees + miscellaneous (including service fees and so on).

So for diamonds you're paying for labor, you're paying for research and development, and you're also paying for scarcity.

“Oh but those penny-pinching Jews deliberately limited the supply of diamonds, diamond mines are full of that crap.”

Scarcity is not in the raw material, but in the labor, in the dexterity, in the precision. The kind of labor that provides that level of dexterity, precision and attention to detail is very, very rare, and it's mostly found among Hassidic Jews who were trained to the diamond cutting business since childhood. 

Question 2: what's the difference between a luxury handbag and a cheap handbag?

Simple answer:

 

Cheap handbag

Expensive handbag

Raw materials and raw material extraction

Cheap stuff

Expensive stuff (scarce and carefully chosen)

Machinery and product processing

Cheap machines with limited functions

Expensive machines with precise functions

Property costs

Cheap rent

Nicely located and expensive rent

Taxes

Usually 20-30%

Usually 30-40-50% (including labor taxes, property taxes, profit taxes, and many other taxes)

Customer relations (including advertising)

Spend little money on that, maybe it's just this one employee who does everything

A lot of money, including research, customer satisfaction surveys, advertising, promotional events, sponsoring, word-of-mouth tactics etc.

Research and development

Usually don't waste money on that

Spend a ton of money training, researching, developing new products, testing products, sampling products etc.

Final question: Why is a barrel of Coca Cola and a barrel of shampoo more expensive than a barrel of oil?

Here's the detailed answer:

 

Barrel of Coca Cola

Barrel of shampoo

Barrel of oil

Raw materials and raw material extraction

Sugar, carbonized water, caffeine and additives cost more money to extract than oil

Eggs, fat, aromas, and other additives cost more money to extract than oil

Oil is cheap to extract (can be a little expensive to explore).

Machinery and product processing

Machines need to be constantly replaced, but privet equivalent to oil machines overall

Equivalent prices to oil

Machines are quite expensive, but they tend to last, and there aren't that many oil fields

Property

Rent fees for Coke add up

Rent fees add up

Rent is usually free, or provided by the government, except for office space.

Taxes

Lots of taxes

Lots of taxes

In most oil producing countries, taxes are “harem” - forbidden by Islamic law

Customer relations

Cost a lot of money, lots of competition

Same as Coke

Few competitors, most customers are desperate, they come to the oil companies, oil companies don't need to look hard to find customers.

Research and development

Constantly need to innovate and adapt the product to customer needs.

Same as Coke.

Almost everything we need to know about oil, we know.

Transportation and distribution costs

A ton of money, truckloads, shiploads

Same as Coke

The pipelines have been around for years, and are built every now and then. But transportation is still rather pricey.

Security and maintenance

Costs quite a lot of money

Costs quite a lot of money

In times of war, the cost adds up. In times of peace, security and maintenance is rather cheap.

Bonus question: why do some businesses fail?

I can give you a few vague examples from my experience:

-Main reason tends to be that the price does not reflect what goes into a product. You have people charging a lot of money because they are famous, or because they are in a trade that tends to be associated with luxury, but their profit margins are too high, at a ridiculous level.

-Other reason is a lot of business owners don't know, or don't control all the aspects that go into a product. Some owners neglect maintenance and security, others do away with research and development, others have terrible customer service.

-Final reason I'll share (among others): when the brand is more arrogant than the customer. Some brands are so arrogant that they believe customers don't deserve the brand. In the 2010s many Korean companies, which were rather successful, were so arrogant about their success that they started believing that they should control and choose their customers. Some Korean brands started demanding ID verification and turning away customers for “wearing shorts” or “not being neatly dressed” or for a “bad haircut” and what not. True story!

Now for the anecdote, those Korean brands still haven't realized how badly they are screwing up, and to this day behave like they are better than their customers. 


     
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