Freeman

ARTICLE

Moms Monopoly, Part II

MAY 01, 1988 by SUSAN J. OSBURN

Susan Osburn is a medical technologist, classical singer, and mother of a fourteen-year-old son and three-year-old daughter. She is currently taking graduate courses at George Mason University, Fairfax. Virginia.

One day, Sam came home from school in an anxious state of mind:

Sam: Mom, I’m in trouble now.

Mom: Why?

Sam: I did so well on my economics essay, with the help you gave me, that now Miss Snick wants me to present a project on the market system.

Mom: Can you do it as a practical project rather than as an essay’.>

Sam: Yeah, I guess so.

Mom: You can do it along with your fund-raising project for the band. Aren’t you going to sell something?

Sam: Yeah! We’re going to sell Booster Buttons, you know, badges that say “Hale High” and have the Hale Hyena printed on them, to the kids at school.

Mom: Okay, that can be your example of the market process. The band will be like a firm, offering a supply of a product to the market for purchase and consumption by your pool of potential buyers, the students. How much are you going to charge per badge?

Sam: About 50 cents, I guess.

Mom: Why that price?

Sam: Well, most kids can afford it, and we’ll still make money.

Mom: So your decision on the price is based first of all on what you think your buyers will pay. How much does it cost you for each badge?

Sam: We checked with Wholesale Badges and it was 20 cents.

Mom: What would you have done if the wholesale company had wanted to charge you 75 cents a button?

Sam: We’d have looked for some other thing to sell. You can’t sell stuff for over a dollar at school. The kids are too broke.

Mom: Right, Price was your first consideration in deciding how to enter this market. You worked back from your price to determine what costs you could allow. Doing that shows you already had some information about your market. Knowledge and the use of it are important for both the buyer and the seller, The kids at school have to have some idea whether 50 cents is a reasonable price for a Booster Button, or a rip-off; and you as a seller have to know how much your buyers are likely to spend for your type of product. How many kids are in the school?

Sam: Two thousand.

Mom: What makes you think they’ll want Booster Buttons? How many will want them? How many will you get from the wholesaler?

Sam: We wish we knew! We have to guess. Mom: Yes, you do. Any firm has to guess what demand for its products will be, because you have to produce them before they can be bought. Then you correct yourself after you see what happens, and make a more educated guess each time. Suppose you get 1,000 buttons, but only sell 750?

Sam: We’d have a sale. We’d knock the rest down to 30 cents to get rid of them.

Mom: Suppose you did that and sold them all. How much would you make?

Sam: Uh—(pencil and paper)—750 times 50 cents—and 250 times 30 cents—S450! Wow!

Mom: Don’t forget those buttons cost you something.

Sam: Oh, yeah. 1,000 times 20 cents-$200. We only make $250. Still okay.

Mom: The reason you had to have a sale is that your supply was too great for the demand at that price. You had a surplus. Even though it may not be so great for the band if that happens, it will be OK for your report, as long as you understand what’s happening. The quantity demanded at 50 cents was 750; at 30 cents it was 1,000- -or at least you could express it that way and avoid confusion caused by the changes in the market brought about by your previous sale of the buttons at 50 cents.

Sam: What I hope will happen is that our Booster Buttons get to be the fad at school, and everyone will buy one!

Mom: That could happen. Changes in taste are some of the factors that affect demand. Another factor would be income changes; for instance, if all the parents took away their kids’ allowances, or all the parents gave their kids raises. More money in your fellow students’ pockets would increase the demand, not just the quantity you could sell. If we lived in Beverly Hills you could be selling Booster Buttons for $2 apiece.

Sam: Not with the Hale Hyena on them, we couldn’t.

Mom: That goes without saying. Now, suppose the buttons got to be a fad and you sold the whole thousand in two days and kids were begging you for more?

Sam: We’d go to Wholesale Badges and order a lot more!

Mom: Two thousand more?

Sam: No, that might be too many. We’d have to think about it.

Mom: So you kids would be showing the characteristics of an entrepreneur: alertness to opportunities, and judgment in responding to them. You notice that you have a chance to sell more badges, so you arrange to get more, but not so many that you can’t sell them and end up losing money. Here’s another thing to think about: What if the choir started selling booster buttons also? And the cheerleaders were selling shakeroos at the same time?

Sam: Hmm. We’d be competing with the choir. We might have to lower our price. But shakeroos are different. Kids might like it best if they could have a button and a shakeroo. Especially girls.

Mom: Right. Two different Booster Buttons on the market are substitute or rival products. Both you and the choir might have to drop prices. The shakeroos might be complementary products to the Booster Buttons. As more shakeroos are sold, Booster Button sales might go up because kids want a full set of rah-rah products.

Here’s something else to think about. What if Mr. Hack, the principal, was worried that maybe some kids couldn’t afford 50 cents, so he ordered you to sell your buttons for 25 cents?

Sam: Oh, brother. If we could only make 5 cents a button, it wouldn’t be worth it. We might as well just ask for donations and forget about selling Booster Buttons. Or maybe just let a couple hundred be sold through the bookstore.

Mom: So by restricting the price you could charge, Mr. Hack would actually reduce the availability of Booster Buttons to a very low number or maybe to zero. Then not only the poor kids would lack Booster Buttons, the whole school might miss out on them. That tendency for supply to be reduced is an effect of price controls in bigger markets, too. In fact, it’s generally true that firms increase the supply of products for which they can get a better price, and decrease supply if the price is less. Price controls are just a special case.

Sam: That’s just common sense.

Mom: Yes, a lot of these ideas in economics are based on the way people actually do things in their best interests. If you try to imagine something happening in the market based on crazy behavior, like people buying Booster Buttons for $100 apiece or the band’s only offering five of them for sale, you have a lousy argument.

Sam: We just have to wait and see what happens when we start selling, don’t we? We can’t predict it exactly or control what happens.

Mom: That’s right. The market consists of interaction between buyers and sellers, so things sort themselves out naturally. As prices go up, buyers buy less; if they are lower, larger quantities are demanded. On the other hand, sellers like to sell at a high price, so they supply more at higher prices, less at lower prices. They can only do that to the extent that the buyers will buy, though! So somewhere in the middle is where prices actually end up as a result of that interaction.

As long as nobody like Mr. Hack or the government interferes, the price you end up with is fair and the supply of goods pretty much matches the customers’ wants. Economists make graphs about this called supply and demand curves. You can make one for Miss Snick, if you want to, but remember that graphs are only drawings. A supply and demand graph describes market interactions about as well as a stick figure describes a person, yet the graph can be useful for explaining markets to a novice.

Sam: You mean the way a stick figure describes humans to a space alien?

Mom: Yes. Are you all set now?

Sam: Yeah, Mom. Are you going to put up the $200 to buy the buttons from Wholesale Badges?

Mom: WHAT?? []

Next month, in the third and final installment of “Mom’s Monopoly,” Sam and his mother discuss competition and antitrust.

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May 1988

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