Evan's Easy Economics: #1 Scarcity and Prices

This article will be the beginning of a series of articles I publish about Free-Market Economics. If you've been reading news articles, or watching the news and had no idea what the heck the economists were talking about, then maybe this series of articles will clear a few things up. I'll keep the titles of the articles similar (Evan's Easy Economics) so you can find them easier if you'd like to search for them!

In addition to this series of articles simply being about Free-Markets, they will follow the Austrian School of Economics. For those Ron Paul buffs out there who don't have much time to spend to learning Austrian Economics, I hope this series of articles will shed a bit of light on the subject!

If you have questions or comments - just add some comments and I'll respond as best I can. Or you can e-mail! I'd love to hear what people have to say!

Hope you enjoy!

All of economics seems to boil down to scarcity. Goods and services all have value, and this value is determined by how scarce they are. The two relentless forces that determine scarcity are supply and demand. A good or service's supply is simply how available it is to people, and its demand is simply how much people want it.

The more of a product there is and the more people that have access to it, the less scarce it is. Its value, and thus price, will be less. The less of something there is, or the harder it is for people to access, the more scarce and expensive it will be. A glass of water would clearly be worth less in a waterfall than in the middle of the Sahara desert. Because water is much more scarce in the middle of a desert than in a waterfall (to put it mildly), it is worth more. This is true for any item or service. If you live in a large country with plentiful farmland, the land and food will be cheaper; if you live in a country where clean water is not readily available, water will generally be expensive; if you live in a land where it rains donuts and the wind is made of wine, donuts and wine would be very cheap. The value of an item is inversely proportional to the supply: the more there is, the less it’s worth.

If a lot of people want an item, or if only one person wants it really bad, then the item is worth more because it is scarce. If only a few people want an item, or if they don't want it very much, then it is less scarce and is thus worth less. A pound of diamonds is clearly worth more than a pound of sand because people want the shiny gem much more than one would want sand. The demand of something is directly proportional to its value: the more it is wanted, the more it is worth.

But what causes something to be demanded? If something isn’t demanded, can it be considered to be scarce? The story of oil is an excellent way to illustrate how this works. People throughout history have always wanted to be able to stay up late and be able to see things in the dark. Unfortunately for whales, one of the best ways to do this was to employ whale oil for lanterns. Because people wanted to see in the dark, the resources of ‘light’ became valuable, and what seemed to be the best resource to fulfill this desire was whale oil.

At the same time that people were risking their lives to hunt down whales and provide whale oil, the best resource known to give people the ability to see in the dark, there were other people who had another problem. Many farmers had the problem of a strange black goo that seemed to occasionally seep out of the ground and ruin their farm land. The black goo was nothing but an annoyance until, one day, a man named Samuel Martin Kier discovered that this black goo could be turned into kerosene. Because people wanted to see in the dark, and it turned out that kerosene could be used to illuminate people’s rooms, and because it turns out that the black goo could be transformed into kerosene, the black goo began to become demanded - it became scarce. Because the goo was demanded, it suddenly went from being nothing more than an annoyance to something that had immense value.

Notice how, in the story above, the end-desire of "seeing in the dark" was what gave both whale oil and the black goo their values. It was not that the goo had always had value. It was not that the labor used to gather the oil and put it into barrels gave it value. It was not that oil has some sort of pre-determined amount of value. It was not that some dictator or other government declared that goo will have value. It was simply the fact that the goo could be used to alleviate a demand that people had. This is how things come to have value.

The supply and demand of something together determine that items scarcity. Scarcity, in turn, helps determine the value and, to a certain degree, the price of that thing. The price is the amount of value the supplier and demander agree to exchange. For example, if the supplier of a glass of milk (a farmer, perhaps) asks for a dollar, and the demander of the milk (the customer) agrees, then the price of the milk is one dollar. If the farmer asks for 7 trillion dollars for his glass of milk, and the demander doesn't want to pay such an outrageous price, then the price of the milk has not yet been decided. Just because the farmer wants 7 trillion dollars does not mean that the price is 7 trillion dollars. This would just be an offer.

Every transaction can be seen in two different ways. For example, in the example above, the supplier was the person with milk, and the demander was the person with dollars. But money is a commodity, too. We could easily look at the transaction in the opposite way: the farmer can just as easily be considered the demander who is buying dollars, and the supplier could easily be considered the customer who is supplying the money. The transaction could be described as “the farmer is buying money with milk, and the customer is selling money for milk” just as easily as it could be described as “the farmer is selling milk for money, and the customer is buying milk with money”. Both people are demanding something, and both people are supplying something; money is a commodity just like everything else.

Although it seems like some mystic and magical entity, “money” is in no way any more mystical than other commodities like “corn”, “computers”, “pencils”, “labor”, or any other good or service. Prices can exist without money. Indeed, bartering societies existed throughout history. But even so, money is just another commodity, which means that currently we're just bartering with one another and it just so happens that half of all transactions involve dollars. We will discuss money, and what makes it seem like it isn't a commodity later in this series of articles.