It seems that everyone you ask claims to know how the laws of supply and demand work. They all say that they understand these laws and believe in them, but do they? Why does everyone believe in this economic theory as long as it works in their favor? As soon as the price goes up on something they want or need, then that was caused by some evil, greedy corporation jacking up the price to make obscene profits.
Are obscene or excessive profits even possible? Some would say it is possible where a monopoly exists. I don't believe it can really happen even then? Having a monopoly would definitely change the dynamic. The company having the monopoly would have total control over their profitability, but they couldn't make unlimited profits. Let me explain.
Think about how the automobile market would be different if there was only one automaker in the world. That automaker could choose to sell their cars for $100,000 each, but how many consumers would be able to afford a car? Chances are, they wouldn't sell very many cars. You couldn't go to another manufacturer if the quality was poor either. However, there still is competition in the marketplace. You would still have the option to ride a motorcycle, ride a bicycle, walk, ride the bus, or take a taxi.
Additionally, would a price of $100,000 each be the point that maximizes the profitability of this single automaker? Probably not. In fact, they would probably offer several different cars to choose from. One model would probably be smaller and less luxurious, offering bare-bones transportation to the low end of the socioeconomic scale. Another model might have a few amenities at a slightly higher price, and it would cater to the massive middle class. Of course, there would still be the luxury model that would likely have the highest profit margin per vehicle, along with a price tag that only a small proportion of the consumers could afford. The cheaper models would generate a lot of volume, so they would likely earn a larger number of profit dollars, even though the percentage profit on each car would be lower. Also, the high volume would drive the cost of production down for all of the different models by increasing the economies of scale (sorry, there's some more of that micro economic theory).
In order for this production and marketing strategy to work, the vehicles would have to be priced low enough that the target market segments for each vehicle could afford to buy it. If they can't, you won't sell any cars. Then, the price has to be attractive to enough consumers compared to the costs of alternative transportation so that they will buy as many cars as you can build. Of course, the company would need to design the car and develop manufacturing processes that keep the cost of manufacturing below the price at which the product can be sold or they won't make a profit at all.
Business analysis would be required. First, the marketing department would do surveys to find out what features the different consumers would like to have and how much they would be willing to pay for the vehicle with different combinations of features. Maybe the cars could even have options to suit different consumers that have differing wants and needs. (What a concept! Tailor the product to individual consumers! Who would have ever thought of that one?) Then, the pricing would determine how many consumers would purchase the vehicle. A calculation using a demand curve generated from the market survey results would determine what volume would maximize profits. (Do you remember the law of diminishing marginal returns?).
Okay, so how can this company get obscene or unlimited profits even in a monopoly like this? Can a true monopoly really even exist? Don't we always have alternatives? In the short run, you may not have a reasonable alternative, but in the long run you do. For instance, if the price of cars was too high, but you worked 20 miles from home, then what could you do? Maybe you could ride the bus, but it takes two hours to get to work and two hours to get home. That's not a very reasonable alternative, but you could sell your house and move to a mile from work. Then you could ride a bicycle or walk or even take a 5 minute bus ride.
The only real insidious market conditions generally don't come from a pure monopoly like the one I have described above. Instead, they occur when all competitors in a particular market collude to control the market. The corrupt group of competitors doesn't have to control 100% of the market to create market conditions that are very favorable to the producers and very unfavorable to the consumer. Even if they only control a very large portion of a market for a commodity that is in great demand, that is bad for the consumer. However, there is still a limit to how much profit can be made, and raising the price will reduce demand. It is unlikely that maximum prices would maximize overall profit.
If a market does allow for a company to make very high profits, how long will that last in a capitalistic economic system? High profits will encourage the company to produce more product themselves to increase profits. Also, other companies will see the high profit potential in this industry and design their own competitive product offering. The consumer benefits in the end, because the increased supply drives prices down, and each competitor will try and cater to a different market segment better than the others do. They are also likely to be shunned by the marketplace if their product quality is substandard, or their prices will be driven downward to compensate. The end result for the consumer will be lower prices, higher quality, and more variety of products to better suit their wants and desires.
So, where does the MessAPolitico come into play here? Well, our illustrious liberal politicians like to talk about how the big, evil corporations are making outrageous profits by stealing from the little guy. Then, they go about passing laws to protect us regular folk with regulations (that drive up the price of automobiles and everything else). These same caring politicians also tell us that they will tax the rich people and their corporations to get that immorally obtained profit back. They will use it to pay for all sorts of "free" services and things for those folks that have been wronged and sent down the path to poverty.
The poor most certainly believe that they deserve this "free" stuff. They also begin to believe that those things they get really are free. A bunch of folks even think that those high corporate taxes are paid by the corporations and the rich folks that own them. Well, the joke's on them, because all of us regular people pay those taxes. That's right. We pay more for all of the stuff we buy from these corporations. We pay for all of the extra costs created by meeting excessive government regulations too. Last, but certainly not least, the higher prices reduce demand, so the people providing the services or manufacturing the products will have fewer jobs.
Anytime the government steps in to help us or protect us or give us "free" stuff, watch out. We're about to fall victim to the law of unintended consequences again! (Hey, maybe I should have made this another installment in my series on unintended consequences.)
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