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

    Joined:
    May 15, 2017
    Messages:
    7,301
    Likes Received:
    1,938
    Trophy Points:
    113
    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

    Joined:
    Sep 24, 2008
    Messages:
    34,628
    Likes Received:
    1,118
    Trophy Points:
    113
    You've typed alot to say 'supply and demand curves shift'. Seems decidedly inefficient!
     
    Capt Nice and Diuretic like this.
  3. kazenatsu

    kazenatsu Well-Known Member Donor

    Joined:
    May 15, 2017
    Messages:
    7,301
    Likes Received:
    1,938
    Trophy Points:
    113
    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

    Joined:
    Jul 20, 2015
    Messages:
    15,716
    Likes Received:
    9,101
    Trophy Points:
    113
    Gender:
    Male
    True.

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

    Diuretic Well-Known Member

    Joined:
    Jul 23, 2008
    Messages:
    11,434
    Likes Received:
    864
    Trophy Points:
    113
    Gender:
    Male
    I understand price. I'm hopeless at economics but I can tell the difference between price and value. Price is transactional. Value is priceless.
     
    Reiver likes this.
  6. Reiver

    Reiver Well-Known Member

    Joined:
    Sep 24, 2008
    Messages:
    34,628
    Likes Received:
    1,118
    Trophy Points:
    113
    Check out Diuretic's comment. Perhaps compare the two posts and use it as part of an efficiency definition?
     
  7. kazenatsu

    kazenatsu Well-Known Member Donor

    Joined:
    May 15, 2017
    Messages:
    7,301
    Likes Received:
    1,938
    Trophy Points:
    113
    Yes. One example: The father of someone in my extended family used to be a millionaire and had a large mansion on the East Coast. (I don't know if anyone saw the X-men film series, but it looked almost exactly like Xavier's school, except only two stories instead of three and minus the tower) But he was a Paper Millionaire. Almost all of his money wasn't real, it was in the stock market. When the stock market crashed in 1929 he lost almost everything.

    Obviously the price changed very quickly, and was not reflective of true wealth. People at the time thought the stock in the companies was worth more than it actually was.
    So in some sense, he never was truly wealthy (though his family lived like it), if one wants to view it in that perspective.

    Imagine thinking you have $300 million in the bank. A few years go by, you gradually keep taking out money, and then by the time you've taken out $500,000 you discover that there is actually only $60 million in your bank account.
    The economy works a little bit like that, when we're talking about things on large scales. The more of something that's sold off, the more price goes down.
    Something might cost $1, but just because you have a million of those items doesn't mean you have $1 million worth of goods.
     
    Last edited: Dec 25, 2018
  8. ocean515

    ocean515 Well-Known Member Donor

    Joined:
    Jul 20, 2015
    Messages:
    15,716
    Likes Received:
    9,101
    Trophy Points:
    113
    Gender:
    Male
    Exactly. Bezo's, richest man. Except, if he were to attempt to convert his portfolio to cash, it wouldn't be worth near what is claimed.

    It's like the headlines recently. Bezo's looses XX billions in one day. No he didn't. More people that I thought possible believe he did.
     

Share This Page