Understanding supply and demand

[wegs]

I understand that when an item's popularity goes up, or it's in high demand for whatever the reason, the price of the item will go up. But, has there ever been a situation in the US economy where prices stayed reasonable (slightly elevated, but nothing crazy) despite high demand? I'm asking because I purchased a small container of pumpkin spice in August, as I was feeling in a fall mood, and it was only $6, and now...it's $22 because it's officially ''pumpkin spice'' season.

$22 seems unreasonable, but I imagine people will pay it. There are other spice brands though, that are closer still to the $6 mark that I paid back in August. So, why charge $22 if you'll only get a few customers, instead of many? I get the principle of supply and demand, but this just seems more about greed, taking advantage of the higher demand since it's autumn.

What do you think?

 

[Seattle]

That's not really how it works. I don't know the specifics of your situation of course but greed, in general, is not a term that applies to a business. It may apply to a person, depending on your definition of greed, but a company is there to make money (within the legal framework).

If they can charge $6 and make $1 profit and sell 100,000 units they will make $100,000. If they charge $22 and only sell 100 even with the higher profit per unit ($17) they will only make $1,700. That wouldn't be greed, that would be stupid.

Now if suddenly there is no more supply (for whatever reason) and they can sell all of their current supply at $22, they will do it. That's not greed. Competition is what keeps the price down, not relative greed among competitors.

If there is a hurricane and water is in short supply there may be price gouging laws in place or just personal morals and good community advertising and you aren't likely to see water prices go up substantially.

Bottomline, greed isn't really applicable, there is supply, demand, competition and the market automatically determines the equilibrium price.

Some are going to say that's simplistic or the textbook answer but it can be all of the above but that is how the system works.

You aren't going to see $22 pricing for long unless there are some unusual factors that you are mentioning or that you don't know about. Other competitors are going to step in and the price will be driven down.

What is your explanation? Is there some reason that someone couldn't just go to another store? Is the product special? I know it may be a seasonal product but there is likely to get more to it than that.

In any event, companies don't price their products based on greed or what is "reasonable". Just as they don't pay you based on what is "reasonable". It's based on a market full of suppliers and demand.

 

[billvon]

I understand that when an item's popularity goes up, or it's in high demand for whatever the reason, the price of the item will go up.

Sort of. It's the ratio between supply and demand. If there's a high demand for fill dirt, for example, its price won't go up very much, because there is a VERY large supply.

But, has there ever been a situation in the US economy where prices stayed reasonable (slightly elevated, but nothing crazy) despite high demand?

See the example above.

But for consumer items - even something as simple as bottled water - demand will dictate price initially, because the supply chain takes a little while (a month or so) to respond to new demand. So if you want bottled tap water from a certain company, the price will go way up for a month or so until they can bottle and ship more water. That's why prices for some items skyrocket before a hurricane.

I'm asking because I purchased a small container of pumpkin spice in August, as I was feeling in a fall mood, and it was only $6, and now...it's $22 because it's officially ''pumpkin spice'' season.

Ah yes that's a problem. Because the supply is seasonal the supply chain doesn't have time to adjust. If you were willing to wait a few months it will be dirt cheap, because after Christmas pumpkin spice drops. But for now . . .

Of course, companies try to anticipate each year because they know the demand will increase. But when they get it wrong - you get $22 containers of pumpkin spice.

So, why charge $22 if you'll only get a few customers, instead of many?

Because they get enough customers to buy all their supply, and they can't make more until after peak demand passes. That maximizes the income for that one particular company, this one particular year.

 

[wegs]

That's not really how it works. I don't know the specifics of your situation of course but greed, in general, is not a term that applies to a business. It may apply to a person, depending on your definition of greed, but a company is there to make money (within the legal framework).

If they can charge $6 and make $1 profit and sell 100,000 units they will make $100,000. If they charge $22 and only sell 100 even with the higher profit per unit ($17) they will only make $1,700. That wouldn't be greed, that would be stupid.

Now if suddenly there is no more supply (for whatever reason) and they can sell all of their current supply at $22, they will do it. That's not greed. Competition is what keeps the price down, not relative greed among competitors.

If there is a hurricane and water is in short supply there may be price gouging laws in place or just personal morals and good community advertising and you aren't likely to see water prices go up substantially.

Bottomline, greed isn't really applicable, there is supply, demand, competition and the market automatically determines the equilibrium price.

Some are going to say that's simplistic or the textbook answer but it can be all of the above but that is how the system works.

You aren't going to see $22 pricing for long unless there are some unusual factors that you are mentioning or that you don't know about. Other competitors are going to step in and the price will be driven down.

What is your explanation? Is there some reason that someone couldn't just go to another store? Is the product special? I know it may be a seasonal product but there is likely to get more to it than that.

In any event, companies don't price their products based on greed or what is "reasonable". Just as they don't pay you based on what is "reasonable". It's based on a market full of suppliers and demand.

I understand but what I'm getting at is why do prices have to increase significantly, even if there is high demand? Because it costs more to make more, okay. But, what keeps prices stable, or from skyrocketing...is also competition. Again, okay. But, if you had a business selling muffins, and they were the best muffins in town, and everyone started flocking to your bakery to buy only your muffins, why would you start doubling and tripling your prices from when you first opened? Is it to keep demand down, so you can keep up with production? There's a lot of competition in the spice world so I found it really strange that the brand I chose, went from $6 to $22 in two months. Even if it is peak season for it. Why not charge $12? I'd have paid double, because I like it, but I'm not paying almost 4x the amount and I don't see their reasoning, when other spice companies are charging far less.

 

[Seattle]

I understand but what I'm getting at is why do prices have to increase significantly, even if there is high demand? Because it costs more to make more, okay. But, what keeps prices stable, or from skyrocketing...is also competition. Again, okay. But, if you had a business selling muffins, and they were the best muffins in town, and everyone started flocking to your bakery to buy only your muffins, why would you start doubling and tripling your prices from when you first opened? Is it to keep demand down, so you can keep up with production? There's a lot of competition in the spice world so I found it really strange that the brand I chose, went from $6 to $22 in two months. Even if it is peak season for it. Why not charge $12? I'd have paid double, because I like it, but I'm not paying almost 4x the amount and I don't see their reasoning, when other spice companies are charging far less.

Companies want to make money. Why do you switch jobs just because you can make more money? Are you greedy? No you make it while you can.

In the case of the spices, it's not going to stay that way. Why do you buy more chicken when beef prices are suddenly super high? Because there is elasticity of demand between those two products. With gas, not so much, you just pay it.

For whatever reason, it is paying off for your spice company (or local retailer) or they wouldn't be doing it. What if you had an old Mustang (car) sitting in your backyard that you thought was worth very little? Suddenly it is "collectible" and everyone wants it and they are offering you $100k. Are you going to say, "no just give me $1,000 because it's a piece of junk and I didn't pay much for it"? Are you "greedy" if you take the $100k?".

There is something missing in your story. You are in a retail store and one bottle of spice is $6 and another is $22 and everyone is buying up all the $22 bottles? Is the spice company discontinuing that spice?

What do you think the explanation is?

 

[Seattle]

I just went online and looked up pumpkin spice. I didn't see any bottles that were $22. So I'm guessing that it was just marked up in the retail store that you were in and not elsewhere.

I'm also guessing that marking it up to $22 wasn't a great business move since it's probably pissing off the customers, some of which may decide to stop going there. If you decide to start going to another store, they lost more by you not coming back than any profit from a one time markup due to having a limited supply.

That's why you don't generally see something like this. It's not a supply and demand issue. It's just bad business (potentially) given the limited detail that I know.

 

[wegs]

I just went online and looked up pumpkin spice. I didn't see any bottles that were $22. So I'm guessing that it was just marked up in the retail store that you were in and not elsewhere.

I'm also guessing that marking it up to $22 wasn't a great business move since it's probably pissing off the customers, some of which may decide to stop going there. If you decide to start going to another store, they lost more by you not coming back than any profit from a one time markup due to having a limited supply.

That's why you don't generally see something like this. It's not a supply and demand issue. It's just bad business (potentially) given the limited detail that I know.

I bought it on Amazon when it was $6 and it’s now $22 - go on their site and type in the search: McCormick pumpkin spice 9 oz

I guess what surprised me is that no other spices were that high so why would a company charge that much, if the competition isn’t? All things being equal, we’re not comparing a Ferrari to a Prius. The price variable for those two cars is obvious as to why, even though they’re both capable of getting you from point A to B. Pumpkin spice is pumpkin spice, not much variation of taste/quality, but I do trust certain brands perhaps, over others.

 

[billvon]

I understand but what I'm getting at is why do prices have to increase significantly, even if there is high demand?

Capitalism. If you can make money and you don't, then other people make that money and drive you out of business.

 

[Seattle]

I bought it on Amazon when it was $6 and it’s now $22 - go on their site and type in the search: McCormick pumpkin spice 9 oz

I guess what surprised me is that no other spices were that high so why would a company charge that much, if the competition isn’t? All things being equal, we’re not comparing a Ferrari to a Prius. The price variable for those two cars is obvious as to why, even though they’re both capable of getting you from point A to B. Pumpkin spice is pumpkin spice, not much variation of taste/quality, but I do trust certain brands perhaps, over others.

It's 16 oz. There is Pumpkin Spice Powder, there is Pumpkin Pie Spice 9 oz, there are other brands that are around $6 for 2 oz.

Is this possibly a "user error" problem?

 

[wegs]

It's 16 oz. There is Pumpkin Spice Powder, there is Pumpkin Pie Spice 9 oz, there are other brands that are around $6 for 2 oz.

Is this possibly a "user error" problem?

Yes, that's it - pumpkin pie spice. 9 oz is $22 (if we're just looking at McCormick) I just looked again.

Anyway, I use this in my post workout smoothies, and it's great. You should try it...hmm, but then the demand will go up. Maybe don't try it. lol

Sort of. It's the ratio between supply and demand. If there's a high demand for fill dirt, for example, its price won't go up very much, because there is a VERY large supply.

See the example above.

But for consumer items - even something as simple as bottled water - demand will dictate price initially, because the supply chain takes a little while (a month or so) to respond to new demand. So if you want bottled tap water from a certain company, the price will go way up for a month or so until they can bottle and ship more water. That's why prices for some items skyrocket before a hurricane.


Ah yes that's a problem. Because the supply is seasonal the supply chain doesn't have time to adjust. If you were willing to wait a few months it will be dirt cheap, because after Christmas pumpkin spice drops. But for now . . .

Of course, companies try to anticipate each year because they know the demand will increase. But when they get it wrong - you get $22 containers of pumpkin spice.


Because they get enough customers to buy all their supply, and they can't make more until after peak demand passes. That maximizes the income for that one particular company, this one particular year.

Gotcha. I forgot about how the supply chain, depending on the industry, takes longer to respond to an increase in demand. I remember the strain on various companies when the ports were backed up. Thanks for the insights!

 

[Seattle]

At least Capitalism is redeemed for another day...

 

[exchemist]

Yes, that's it - pumpkin pie spice. 9 oz is $22 (if we're just looking at McCormick) I just looked again.

Anyway, I use this in my post workout smoothies, and it's great. You should try it...hmm, but then the demand will go up. Maybe don't try it. lol

Gotcha. I forgot about how the supply chain, depending on the industry, takes longer to respond to an increase in demand. I remember the strain on various companies when the ports were backed up. Thanks for the insights!

The other thing about this is nothing says the market for something like pumpkin spice will be as well-determined as for crude oil, say. People don't pay much attention to it, so some sellers can try on a high price and not many may notice, for a while. You get that kind of thing with pills in the pharmacy. You can pay almost as much for 30 vitamin D tablets as for 180, just because nobody really know what the "right" price should be for something like that.

 

[parmalee]

Yes, that's it - pumpkin pie spice. 9 oz is $22 (if we're just looking at McCormick) I just looked again.

Anyway, I use this in my post workout smoothies, and it's great. You should try it...hmm, but then the demand will go up. Maybe don't try it. lol

Just make your own: cinnamon, cloves, nutmeg and black pepper--the black pepper is critical. Forget allspice, unless you've got it--kinda just tastes a but like the first three ingredients combined anyway. Maybe some cardamom too.

And 9 oz.? Jesus Christ, what kinda quantities are you using in a portion, say? I figure 9 oz. is probably between a cup/cup-and-a-half. That's like enough clove to kill maybe a couple packs of werewolves.

 

[Seattle]

The other thing about this is nothing says the market for something like pumpkin spice will be as well-determined as for crude oil, say. People don't pay much attention to it, so some sellers can try on a high price and not many may notice, for a while. You get that kind of thing with pills in the pharmacy. You can pay almost as much for 30 vitamin D tablets as for 180, just because nobody really know what the "right" price should be for something like that.

It's not because no one knows what the "right" price is.

 

[wegs]

Just make your own: cinnamon, cloves, nutmeg and black pepper--the black pepper is critical. Forget allspice, unless you've got it--kinda just tastes a but like the first three ingredients combined anyway. Maybe some cardamom too.

And 9 oz.? Jesus Christ, what kinda quantities are you using in a portion, say? I figure 9 oz. is probably between a cup/cup-and-a-half. That's like enough clove to kill maybe a couple packs of werewolves.

I love pumpkin spice in nearly everything during autumn. Soups, protein shakes, mix in with coffee grounds in a French press, etc

I didn’t really need 9 oz but it was $6 back in August and I still have it, so it lasts a while.

I should make my own though, you’re right on that. Cardamom would make it unique, hmm.