Price is not the same thing as inherent worth

Discussion in 'Economics & Trade' started by kazenatsu, Nov 29, 2018.

  1. kazenatsu

    kazenatsu Well-Known Member Donor

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    Current price is not the same thing as inherent worth, and I want to show two examples to illustrate that.

    Imagine there is a neighborhood with 100 houses, for the sake of simplicity let's say they are all identical. A few of the houses are for sale, and are selling for $400,000.
    Well, some might immediately say the total worth of all those houses are $40,000,000.
    No, that's not true.

    If you tried to sell all those houses at the same time, they would not be able to sell for $400,000 each.
    There might not be enough buyers all willing to pay that. Or with more houses for sale than buyers, the sellers might start having to lower their prices to get the buyers. (You may not be able to sell your house if someone else is selling their house for less)

    This could be seen as an example of the fallacy of composition - what is true for the individual parts may not necessarily be true for the whole.

    Let me switch to another example.

    A can of beans sells for $1.

    Now let's suppose there's a natural disaster and there's a raid on the stores. Everyone is frantically trying to stockpile food because the supply routes are likely to be cut out. The store shelves are going to be picked bare and there's not going to be enough food for everyone.

    That same can of beans could sell for $5.


    As you can see, current price is not always a good indicator of inherent wealth.

    In economics there's a concept known as the demand curve. Price will vary with different available quantities, and the demand curve theoretically tells you what the price will be for any particular quantity being sold.

    Now, I've been thinking about this from a business point of view. There is always a small calculated chance that something that's very cheap now could drastically increase in price in the event of an emergency in the future.

    Suppose something, that we will call Unit A, sells for $1 currently, but there is a 1 percent probability that there could be a situation that would cause it to be able to sell for $200.

    Some people have criticized the concept of capitalism saying that there's no incentive for private business to prepare for an emergency. That's not necessarily true.

    The question is, what is the potential price going to have to be to incentivize the business to stockpile merchandise for the chance of an emergency?

    Some people will complain about private businesses gouging customers during an emergency, but I would say this could be a necessary requirement if we want businesses to make preparations for an emergency.
    If something that's normally cheap gets very expensive during an emergency, that tells you it's not very efficient to be stockpiling large quantities of merchandise based on a small chance that they will sell. By paying high prices, you're paying businesses to take the risk.
    You're not escaping the fundamental economics by having the government take over the distribution system.
     
  2. Reiver

    Reiver Well-Known Member

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    You've typed alot to say 'supply and demand curves shift'. Seems decidedly inefficient!
     
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  3. kazenatsu

    kazenatsu Well-Known Member Donor

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    Not everyone understands that terminology.
    When people don't understand economics terminology, you have to explain things the long way.
     
  4. ocean515

    ocean515 Well-Known Member Donor

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    True.

    It's like the lame measure of "richest" person, when it's measured by stock value.
     
  5. Diuretic

    Diuretic Well-Known Member

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    I understand price. I'm hopeless at economics but I can tell the difference between price and value. Price is transactional. Value is priceless.
     
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  6. Reiver

    Reiver Well-Known Member

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    Check out Diuretic's comment. Perhaps compare the two posts and use it as part of an efficiency definition?
     

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