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Supply and demand law fallacies Supply and demand law fallacies
by Joseph Gatt
2020-08-15 10:39:53
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Classical economic theory has it that there's a certain demand for a product. The product is met with supply. And depending on the availability (supply) and the demand of the product, a price will be set.

But here are some fallacies about this law.

Fallacy 1: consumers purchase and pay for “the brand”

False! They purchase the quality that goes with the brand. Indeed, for two products of equal quality, the brand can be important.

But I've met quite a few companies, mostly in Asia and Africa, where they go like “those dumbass consumers will buy anything the minute they see our logo.” There are no dumbass consumers.

Fallacy 2: The “free market” is “le capitalisme sauvage” (bestial capitalism) and we need government intervention.

trade001_400From a purely supply and demand perspective. Consumers want quality and tend to purchase those products that they need, that they can afford, that they have time to consume.

When the government intervenes, in my opinion, all it does to the market is distort the truth and emit a package of lies on the supply/demand chain. What do I mean by that?

Consumers use their common sense to determine what the quality of the product or service is, whether they need the product, whether they can afford the product, and whether they have time to use the product.

When the government intervenes, the government interferes with the consumer's definition of “quality” along with “affordability” and “time to consume the product” along with “product need.”

Example 1: government subsidizes a product. A loaf of bread will cost 5 cents. Now this does not do service to the supply chain (wheat farmers, yeast producers, bakers, flour companies etc.) and makes the whole bread market a total lie.

Example 2; The government restricts freedom of the press. That does not do service to media companies, media consumers, and has ripple effects on the market as a whole.

The government can indeed interfere if a product is harming consumers. But sometimes governments intervene because some individuals and companies offer excellent services, and the government fears that the said company will make so much money that they will start influencing or interfering with government activities. Or sometimes it's large businesses who shoot down “up and coming” businesses who are competing with their products.

Fallacy 3: the media and advertising are about “forcing” consumers to purchase things they don't need with money they don't have to impress people they don't like.

Here's where it gets a little complicated.

We, as individuals, are also a “product.” After all, we “sell” our labor to our company. The company which employs us is our “client” and pays us a monthly salary for our “product.”

At your company, perhaps there's only one accountant, and you're the only accountant. You are perhaps not competing with anyone to keep your job or for a promotion. You are the only one with insider information, replacing you would be complicated, and you have no internal competitors.

Now at many companies, they don't hire accountants, but “administrative assistants” that do accounting work among other stuff. So you are competing with a dozen (or dozens) of administrative assistants, and that means you need to get a 100 dollar haircut, you need to wear a brand new outfit to work almost every day, and you need to drive a car that borders on luxury.

And when you're competing with dozens of colleagues, competition never ends. Next thing you're going to get plastic surgery, you're going to wear hand-made ties, you're going to go to work with a 300 dollar pair of sunglasses, a 500 dollar suitcase and a 10,000 dollar diamond ring.

And with that you hope you won't be overlooked for a promotion and that they won't fire you from your job.

As much as some products or services have many competitors (restaurants, juice, cheese, food, fashion,  many other products) some products are more rare and don't compete with much of anyone.

The question you need to ask yourself is “can I afford to compete?” Competition is a heavy investment, and many companies go broke every year because they invested too much trying to compete with competitors.

Fallacy number 4: The salesman is important. People buy products from people they like and are friends with.

A good salesman is someone who knows what's in the product, and who can answer pretty much any question you have about the product. A good salesman also knows what range of quality his product is in (and has an honest assessment of that) and whether clients need the product, what they use the product for, whether clients have time to use the product, and whether clients can afford the product.

Now here are mistakes companies make with the salesmen they employ:

-Company refuses to discuss the product, what's in the product, and who the consumers are. Salesmen are in the dark. There's nothing worst for a salesman than having to try to sell a product when he has no idea what the product is.

-When salesmen compete for sales statistics. It's always a good thing not to publish and make public sales figures. When salesmen are competing for the best figures, they start using dirty tricks, and eventually sales dip.

-The best companies (for all I know) reward their salesmen collectively (that is salesmen all get the same amount for commissions made on sales). Then the general manager discreetly reviews individual statistics and discusses those with confidentiality with the salesmen.

-Salesmen are forced to sell a bad product. There's something almost worst than having to sell a product you know nothing about: having to sell product you know is bad.

Now remember a bad product is not alcohol and cigarettes. It's a product that does not satisfy the quality standards consumers expect.

I feel bad for Korean real estate agents for example, who are forced to try sell “cardboard apartments” (the walls are literally made of cardboard) for a million dollars, because the owner can only sell the apartment for a million bucks or more to break even and cover his debt.

Fallacy 5: human resources are not important in the supply/demand chain

Employees need to be reliable. Here are two reasons why employees are not reliable:

-Their families/friends constantly interfere with their professional activities. If you have huge family problems (debt, competition with other families, family drama) you will not be reliable on the job. Your family will keep interfering with your performance on the job.

Because of personal or family problems, some distributors or employees take the money and run. Others drive away from their routes to go solve a family dispute, or don't show up because of a family dispute. Problem is there are family disputes every day.

-Their colleagues are not reliable. I remember working for a company. Now I can focus on one task, two tasks, three tasks. But my boss (the asshole) would throw dozens of tasks a day and expect me to do all dozens of them in reliable fashion. I did tell him “one at a time buddy!” and he went like “I'm not your buddy” and I went like “I quit, find yourself another bitch!”

In sum, if there's a culture of lies, treachery, and lack of communication in the environment, employees will not be reliable.

IMPORTANT NOTE: In some countries, this culture of lack of reliability is the very reason business is very, very difficult, if not impossible. In many Latin American countries, in Africa and in Asia, finding reliable partners in business (Human resources, distributors, logistics, transportation etc.) is almost impossible.

Oddly enough, many Big Name companies think that if you hire a Venezuelan to deal with Venezuelan incompetence he'll do a better job than an American or a Chinese would. I would say, if you're a Big Name company, hire someone with an open mind, someone who keeps thinking in terms of plan Bs and plan Cs, someone with enough patience to keep looking for reliable people, and enough dignity to respect and keep his reliable employees. Don't hire people based on citizenship or the countries they grew up in when they were kid to do the task of managing projects in countries where human resources tend to be unreliable.

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