Supply and Demand
I hear it all the time. Market price is governed by supply and demand. Nerds are in short supply so they are expensive. Make more nerds, supply goes up, price comes down. Nerds are two for a dollar. Convert a pocket full of nerds to Republican drones and they become scarce. Price automagically goes up.
Or does it?
Does constant or even increasing demand for nerds cause the price of a nerd to go up? Or does it permit those who have nerds in hand to decide to raise the price? Are those two things synonymous? Does demand cause price to rise or does it permit price to rise?
Yes, I understand about the fiduciary responsibility which which is cited by the producers of nerds to force them to maximize the return on investment to owners of the nerd factory. But is there no constraint on that responsibility? Can prices rise until demand elasticity sets in and people choose suits and long neckties over T-shirts and pocket protectors?
Dump the nerds and replace them with oil/gasoline. Are fuel producers free to exploit unbounded price inflation? Or is there some point where one should say that a limit has been reached. Can further profits be excessive and harmful to the overall economy, leading to economic collapse and huge losses for the producers?
I don't know. I quit producing nerds and my family sold their part of southeast Texas without finding oil. Now I make notes (in the key of your choice), but have no answers. Are there readers out there who have something to say?
Akakie
posted by AkLewy at 7:27 PM
4 Comments:
My understanding is that oil companies turn a profit of about 9 cents a gallon on gas. The federal government gets about 44 cents per gallon. If there is some point where we should be limiting the oil companies from getting more profit (and I'm not sure there is) it seems like it shouldn't be at a point where the government's getting more than they are.
I did not suggest "we" should impose a limit on oil company profits. I asked (indirectly) if there is a point where profits become excessive, which in turn asks the question, "Is there a point where pure profit motive breaks down?" Demand keeps going up. Prices follow, because they can. Should business ever say, "I'm making enough profit. Even if demand rises, I choose not to increase price."
As to the profitability of oil companies, perhaps they make 9 cents per gallon on gas. How much does the same company make on transportation of product, on refining, on pipelines, on extraction and sale of the raw matrial?
And what does "the government" do with that 44 cents? Build and maintain roads? Subsidize exploration? Something productive?
My points are that this isn't a simple issue, not all government is waste, not all profits are apparent.
I don't know if the 9 cents per gallon reference is just on the gas itself or on the other business many oil companies are in. Of course, many companies are in many businesses with their own P&Ls and such and those aren't the ones people get agitated over.
I guess I was responding as much to other articles and statements by congressmen as much as your actual entry. The mention of "how much profit is too much" got me immediately thinking about proposals for windfall profit taxes.
I just looked up an article (one of several he's written) by Walter Williams, an economist I respect, on this very topic that I recalled reading last year. Williams is good at taking complex problems and distilling his key message into a short article. Here's the link:
http://www.townhall.com/opinion/columns/walterwilliams/2005/11/09/174865.html
Mr. Williams provides a very clear definitation of windfall profits, which is handy to have around. His example seems simplistic, though.
If Harrisburg is out of bread and loaves soar to $20 each, then any enterprising person with access to yeast, flour, water, and an oven can be in the bread business in 10 minutes. Twenty dollar bread will be short-lived, simply because the time and cost to enter the bread business are low.
That isn't true for production of auto fuel. With all the permits and planning required, the time to construct massive structures, and exploration for raw materials, time to enter the fuel production business is 20 years and the cost is in billions. A whole generation of Harrisburgers would have to subsist on chocolate from nearby Hershey, PA.
In Alaska, oil executives are threatening to reduce production, eliminate workers, and eliminate charitable contribution programs because the state is involved in a restructuring of taxes. The current system is extremely favorable to the companies. The new one, negotiated in secret by the governor, now in legislative review and tied to a still-secret contract for natural gas is more balanced.
All we know about the gas contract is that industry wants a 30-year freeze on any changes to rates. Cute. Probably not legal or constitutional. Oil companies are not popular here right now, especially in the middle of windfall profits and record earnings.
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