Basic Economic
Concepts essential to Speculation
7) How Consumers
Direct Production through the Market
The ultimate arbiter
of price is the consumer. As we have seen, the consumer’s valuation is
based upon his or her subjective appraisal of the utility of a good. If the
consumer needs something and can make an advantageous trade, he or she does so.
If the price is too high, he or she will not pay it. Good business people know
that they cannot stay in business for very long by producing what they wish to sell – they must
produce what their customers wish to buy.
The market directs the individuals that comprise it. It
tells producers what and how much to produce, and where, how, and when to
deliver it. It also determines which of the consumers who desire goods will
obtain them. It does this through the mechanism of price.
If consumers want
more of something than is currently being produced, producers recognize the
increased demand and raise their prices. The increased prices serve two
functions. The most immediate impact is to ration the existing supply by
providing the goods only to those consumers willing to pay the increased price.
Marginal consumers, the ones that were not willing to buy at the lower (but not
the higher) price, are precluded from buying. Equally important, but usually
slower to occur, the higher prices encourage (1) more production of goods for
which demand has increased and (2) reduced production of marginal goods of a
different nature.
Supply and demand
meet each other in many different locations and under many different rules.
They meet in your grocery store. They meet on exchanges and in boardrooms. They
meet on street corners too.
Producers supply the goods that consumers demand.
They can do it inefficiently at the direction of a
centralized government as is common in some socialist and communist countries. Or
they can do it efficiently, as directed
by speculators in a free economy. The next instalment of this series will
go on to show how speculators direct the markets to maximize the utility of
society as a whole.
The Speculator’s
Edge,
Albert Peter Pacelli
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