CHAPTER 10: How Demand Determines Supply

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We now know from what we have learned regarding Prices, Profits, and Market Forces that there are some Organic Economic™ self-regulating “systems” which seem to regulate economies automatically (i.e without some government agency, bureaucrat, or “economist” making the decisions for the market, as which occurs within most modern economies today, though to different degrees).

Now we will expand upon that foundation within this closely related article and see even more clearly how the God-ordained “laws” of Creation work by His Sovereign design to regulate free markets through His Organic™ principles.

The “Sovereign” Consumer

While nobody within humanity is “sovereign” in the absolute sense (as all are accountable to God, Who alone is truly absolutely Sovereign), it yet remains an Organic Economic truth that within ALL markets that function according to God’s creative design, the consumers (in aggregate) are the ones who primarily drive the markets:

  • It cannot be the merchant; for how could he excel in the marketplace by offering products that buyers do not want?
  • It cannot be the producers; for why would they grow or manufacture something that consumers have rejected?
  • It also cannot be the laborers or service providers; for how could they possibly be employed in tasks for which nobody intends to pay them?

It is primarily (but not exclusively) the demands of the consumers which drive the “automatic” regulating functions within the marketplace.

And remember, EVERYBODY in society is a consumer under certain circumstances, while a producer or service provider under other conditions. To make this point very clear, let me again remind you of an earlier organic truth from The Biblical Genesis of Trade within this context:

Labor Specialization: God has designed each person born of a woman differently, to include different strengths (abilities) and different weaknesses (liabilities). Through social cooperation, however, this fact becomes a blessing as each person realizes he or she is dependent upon others for the services/goods that one cannot provide for themselves.

Every person has their own “labors” or “products” to bring to market in order to exchange them for the “labors” and “products” produced by others. The advent of money and prices did not change this dynamic at all. So now let me remind you of an earlier organic truth from The Biblical Genesis of Money:

The Nature of Exchange: All exchange transactions are in their essence simple “barter” transactions that exchange goods/services for other goods/services. Indirect exchange transactions are simply more efficient “barter” exchanges in that they exchange a good/service for an intermediary monetary commodity, which is then exchanged in turn (and time) for other goods/services as the buyer desires.

So it would be logically (and biblically) absurd for someone to assert, in the light of these self-evident Organic Economic™ truths, that somehow “profit” or “commerce” is in any way detrimental to mankind’s welfare. Every member of a society is benefited by their ability to freely exchange their labors and “fruits” of their labors with others, in order to obtain those things they cannot (or do not wish to) produce themselves.

Consumer Demand

The purchasing behavior of consumers (in aggregate) provides the primary market force for determining prices AND the markets’ product/service composition. Most people can understand this concept quite easily, as experience tells us all that when consumer demand for certain products increases dramatically, the price goes up. When demand falls, so does the price within the marketplace.

A good example in today’s technological age is the consumer electronics industry. If Apple Computers, Inc. rolls out a new “iPod Ultra Supreme” (a product I just made up for illustration purposes) and EVERYBODY feels they absolutely “must” have one of their own, then such consumer demand will tend to drive the price upwards. On the other hand, if consumers reject the product en mass, then Apple Computers, Inc. and its retailers would have to drastically reduce the price in order to unload their inventory on the less-than-enthusiastic public. An extremely poor sales performance would probably result in the product being removed from the market entirely.

Another example that we have seen today is constituted within the electronic book reader industry (e.g. Amazon’s Kindle, Apple’s iPad, and other competitive readers). An increase in competition among manufacturers brings about an increase in choices for the “sovereign consumer.” They can choose either this one, or that. Thus, the net effect in those consumer choices tends to drive prices down on the less-desired devices, while either maintaining the pricesor diving them higherfor other devices with more highly desired features. However, a nearly even distribution of demand among many of the available choices within the market (as seems to be happening within the electronic book-reader market today) will tend to drive prices down on ALL available choices within that market segment. Thus, the consumersnot the manufacturer or retailer—move the market.

So let me briefly point out another organic point in light of what we have just explained:

Producer Expectations: Expectations of sufficient consumer demand motivates producers and merchants to bring goods and services to the marketplace. However, this motivation is completely predicated upon the Profit Motive and Aversion to Loss principle. Such Producer Expectations will bring new products to market (e.g. new technologies) and/or encourage  businesses to enter new markets (e.g. in other cities).

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However, it is the response from consumers—communicated to the producers, merchants, and service providers via the profit-loss feedback system—which will ultimately reveal if the business decisions made by these providers were good or bad. This feedback then “dictates” to the producers once again (via their own Profit Motive and Aversion to Loss) what should be the subsequent product supplies and product innovations, by simply changing the producer’s subsequent expectations.

This principle above might at first glance seem a bit complicated, but in reality it is quite simple when you ponder the Organic Economic™ principles upon which it is founded.

Consumers simply evaluate the offerings of products/services within the marketplace, and make their purchases. The aggregate demand of the consumers will then result in either profits or losses for the merchants and their producers. Chasing profits, and running from losses, these businesses will then re-evaluate their products and markets, and then make new business decisions based upon the information they have obtained through the manifest consumer demand. These new decisions are based upon new expectations, and thus, time will tell whether these new business decisions were good or not. How? By whether they were profitable or notand if they were, how profitable.

Supply Considerations

However, the price-feedback system is also supply dependent. The higher the supply (relative to a certain demand) the lower the price, as a general rule. The higher the demand (relative to a certain supply) the higher the price, as a general rule.

Remember: We learned within The Biblical Genesis of Trade that the scarcity of resources, labor, and time, all affected humanity’s choices in survival and wealth creation. So a shortage of a desired commodity, good, or service, would tend to drive prices up; while an overabundance (in relation to consumer demand) would necessarily drive prices down.

Let us now see how this consumer-feedback mechanism not only affects prices, it also tends to regulate supply. We have already learned through the new principles above that the Profit-Motive, Aversion-to-Loss Organic Economic™ principle that we learned about before “dictates” to producers, merchants, service providers, and laborers, what goods/services they are to bring to market. This, therefore, actually provides society with an “organic” and self-regulating system of supply determination and adjustment:

Price-Effected Supply Determination: The price-feedback system of the “Organic” free market has the effect of determining the supply levels of goods and services in the marketplace. When market prices rise on a certain product (or service) due to increased consumer demand or supply shortages, producers will respond by increasing their production in order to capture more of that new profit potential; and/or NEW producers will enter into that market seeking profits by offering to fill that supply deficiency.

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When market prices drop on a certain product (or service) due to decreased consumer demand or supply excesses, producers will respond by retarding (reducing) their production, and will invest instead into the production of more profitable goods (or services) as they might be directed towards by this same price-feedback system; and/or marginal producers will leave the market entirely because they are not profitable enough to maintain their presence therein, thus also reducing the oversupply through their departure.

This is a very powerful point: The consumers’ demand—relative to supply levels—affects prices; and this price-feedback to the producers and merchants will in turn influence their decisions and subsequently affect the market’s supply. Thus, the Profit Motive, Aversion to Loss is a major benefit to all consumers and society as a whole:

  • Shortages (relative to demand, which tend to drive prices up) will soon be resolved by an increase in supply, as currentand newproducers and merchants bring more product to market to meet that deficiency. The motivating factor that influences them to do this is an “organic” profit motive that encourages producers and merchants to fill that need.
  • Surpluses (relative to demand, which tend to drive prices down) will soon be resolved, as current producers either reduce output or leave the market entirely. The motivating factor that influences them to do this is an “organic” aversion to suffering losses—and this influence also works with the profit motive to encourage producers and merchants to seek higher profits elsewhere by solving other shortages.

So when shortages occur (e.g. through natural disasters, crop failures, etc.) the Organic Economy™ has a self-regulating system that will ensure that new supply finds its way into that market to meet that consumer demand. This new supply might come from another geographic location that has an oversupply relative to their own consumer demand. So this amazing economic principle brings to mind a Scripture that illustrates this “re-balancing” of supply perfectly:

For I do not mean that others should be eased and you burdened; but by an equality, that now at this time your abundance may supply their lack, that their abundance also may supply your lack—that there may be equality. As it is written, “He who gathered much had nothing left over, and he who gathered little had no lack.”

(2 Corinthians 8:13-15, NKJV, emphasis added)

However, no apostleor any other personhas to make such a supply re-balancing occur within a free Organic Economy™. It happens automatically, because of the Organic Economic™ principles already at work. It was the marvel of this self-regulating system that prompted the economist, Adam Smith, to attribute these amazing market forces to the “invisible hand” of God operating within the affairs of men. And given what we have learned so far about God’s Organic Economic™ laws as He gave them to men through His self-determined role as  our Creator, I obviously can agree with that assessment even from a purely biblical point of view.

One Woman’s Wisdom

To illustrate and enhance all of the Organic Economic™ truths we covered above and within Prices, Profits, and Market Forces and the previous chapters, let us now consider this excerpt from the “wisdom” Scriptures penned by King Solomon.

In the thirty-first chapter of Proverbs, God’s Word describes a brilliant and industrious woman—who is not only an amazing wife and mother, but also a skilled businesswoman. As you read this excerpt, consider how well it exemplifies the things we have discussed within this article. My own notes are within [brackets] below for additional contextual clarity:

She seeks wool and flax, and willingly works with her hands. She is like the merchant ships, she brings her food from afar. She also rises while it is yet night, and provides food for her household, and a portion for her maidservants. She considers a field and buys it; from her profits [i.e. profits she made through her clothing manufacturing, which will be described below] she plants a vineyard….She perceives that her merchandise is good [i.e. it is accepted in the marketplace and profitable], and her lamp does not go out by night. She stretches out her hands to the distaff, and her hand holds the spindle [i.e. she makes more garments to sell, as is noted in the verses below].

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She extends her hand to the poor, yes, she reaches out her hands to the needy [i.e. she can be generous towards the needs of others, because she produces more than she needs for her own household, as the following verses also explain].

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She is not afraid of snow for her household, for all her household is clothed with scarlet. She makes tapestry for herself; her clothing is fine linen and purple….She makes linen garments and sells them, and supplies sashes for the merchants [i.e. she manufactures clothing for herself and family, but also for sale within the marketplace]

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She watches over the ways of her household, and does not eat the bread of idleness. Her children rise up and call her blessed; Her husband also, and he praises her: “ Many daughters have done well, but you excel them all.”

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Charm is deceitful and beauty is passing, but a woman who fears the LORD, she shall be praised. Give her of the fruit of her hands, and let her own works praise her in the gates.

(An excerpt from Proverbs chapter 31, NKJV, emphasis and bracketed notes added)

This amazing woman was a faithful wife and a loving mother. She was also a skilled homemaker, even supervising a crew of household servantswho likely also doubled as employees within her businesses.

Her business pursuits included clothing manufacturing; and she had established trade relationships with merchants who then sold those goods in the marketplace. The price-feedback system worked perfectly, in that she “saw” that her merchandise was in high demand, and thus, very profitable. So she increased her output (even working nights), which in-turn increased both the supply she offered the markets and her total revenues.

Out of these proceeds, she made a real estate purchase, and then developed the land into a producing vineyard (the several expensive steps which were described by Jesus in Matthew 21:33 and Mark 12:1). Thereby, she diversified her business income by expanding into agriculture.

Her success was evident within the circumstances I just noted above, of coursebut also within these facts found within the citation from Proverbs above:

  • Her own family’s fine clothing and ample supply of food, which this Bible narrative actually seems to attribute to her business enterprises;
  • Her maidservants’ abundant provision (income) from their own labors on her behalf;
  • The poor and hungry within her city being clothed and fed through BOTH her abundance and her generosity;
  • AND the needs/wants of the consumers within her city being satisfied by her providing the market with quality products that they wanted/needed to buy;
  • AND the profitability of the merchants, who were essentially partners with her in these noble business endeavors.

In short, this woman sets for us all an excellent example of how godly people can bless everyone around them—through both business pursuits and charitable generosity—because of their application of Organic Economic™ principles according to God’s original design.

Summary

Let me close this article by reiterating several of the points that we have discussed so far within Organic Economics™, so as to provide us with somewhat of a general summary of everything that we have covered to this point:

  • Humanity lost the initial abundant provision given to it by God, through man’s sin. Scarcity of resources then became a dominating issue, and hard labor was required to survive and produce new wealth.
  • Wealth itself is merely a “thing” and not inherently good or bad. When honest pursuits result in the attaining of wealth, it benefits the individual, their family, and society as a whole.
  • Humanity is endowed with diversity; everyone has their own abilities, aptitudes, weaknesses, and preferences. Thus, a specialization of labor emerged immediately after the Fall of Adam, and mankind began a process of self-discovery.
  • This specialization, coupled with the conditions of scarcity, made interpersonal exchange helpful to all parties. Labor became economized (i.e. less work was required for the same output), people could focus on what they liked to do most and could do best (i.e. were happier and more productive), and everyone benefited by this advancement. Voluntary trade was born, and society prospered as honest trade increased and proliferated.
  • We see in Genesis 2:12 that God considered the gold in the land of Havilah as “good.” The Hebrew adjective translated as “good” there means “good, pleasant, agreeable” to the senses, “good, rich, valuable in estimation” economically, and “good, right” morally. In short, God made gold by His own design, and then defined it as attractive in appearance, precious in value, and morally “right” for possession.
  • Thus, human awareness of the intrinsic value of  gold (and silver) seemed to be instilled within mankind at the very beginning of creation.
  • Silver and gold were also confirmed by human experience to be “money” through the ongoing trade of the free markets. Copper alloys were also employed as exchange mediums for items of smaller value. These metals are very portable, had intrinsic value, and easily divisible (and their purity identifiable by reasonably savvy market participants).
  • Gold, silver, and copper, “money” caused simplified transactions to become possible. “Prices” emerged, which also helped both buyers and sellers when calculating costs, profits, and savings. “Prices” could also be compared, and exchange negotiations became more streamlined.
  • Prices also resulted in a Profit-Motive, Aversion-to-Loss market-based “feedback mechanism” which permitted suppliers to know which products/services the consumers demanded. This feedback mechanism then became an automatic and self-regulating force which determined supply levels and the goods/services composition within the marketplace.
  • And the combination of all such factors benefited ALL participants within these economies, and their entire societies as well.
  • These same market forces also helped to promote new innovations, and business expansion into new markets; thus, benefiting society (naturally speaking) even further.
  • Yes, the simplebut ancientdiscovery and use of “money” actually gave birth to all these economically and socially beneficial advancements.

So if you think about it, with what we have already covered within in Organic Economics™ to this point, we can see that a shockingly “modern” form of commerce was born way back in antiquity. Though today’s variant may seem more “advanced” through the use of computers and modern financial systems, the key “organic” components that we have covered thus far must be in place for any marketincluding today’s markets—to function efficiently and properly, for a prolonged period of time.

So what will we be covering next? Within Storing Value for the Future we will discover how labor can travel through both space…and time.

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For more information about Rev. Rich Vermillion, please view the brief bio at the bottom of TheWisdomOfGold.com’s Website Introduction page, or visit his public LinkedIn profile page at: http://www.linkedin.com/in/richvermillion

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