What Things Cost

by Peter Wallace, © 2007

I was at the Piggly Wiggly store in Cambridge Monday morning, getting breakfast supplies for the week ahead. I like to have a bowl of cereal at my desk in the morning, since it gives me the chance to sleep a little later.

I went to the milk cooler, and this is what I found: The small size of Food Club skim milk – a pint, I think, was 89 cents. The one-quart size was $1.55. But, guess what? the ½ gallon size was also $1.55. I wondered how getting twice as much could cost the same amount…

As consumers, I think most of us are in the dark about prices. I took an economics course in college, but dropped it, since the professor had such a strong Russian accent that I couldn’t differentiate between his macros and his micros. Later, in graduate school, I was formally introduced to the basics of free market economics, but by then, I had pretty much figured it out on my own, and from my business professor dad.

The truth is, something is worth what somebody will pay for it. In the world of the arts, that becomes quite obvious. There may be a painting that looks like a splash of paint on a canvas that is priced at $5,000, which most people would think of as ridiculous. But, if someone likes it enough to buy it at that price, that’s what it is worth.

Bottled water is a good example. Twenty ounces of water, which is readily available for free, costs around a dollar, unless you’re at Disney World, where it costs $2 – or at least it did ten years ago. What would happen if people stopped buying it? The price would go down to 75 cents, then 50 cents, and maybe even lower.

When the price of gasoline jumped to $3.33 Saturday night, another round of accusations started up. I’m sure Congress will have more investigations, but what they generally find out is that the cost of gas is determined almost entirely by the interaction of the supply and the demand.

Supply and demand can be impacted by many factors. If the supply is artificially withheld, that’s criminal, and people go to jail for that sort of thing. Doing seasonal maintenance on refineries before the summer driving season is a good thing, but has an impact on the supply.

One thing Congress is NOT having an investigation about is their idiotic scheme of messing with Daylight Savings Time, which apparently had the opposite effect of what they thought would happen. Instead of saving millions of barrels of oil, the “extra” daylight apparently has inspired people to drive more.

I’m no big fan of oil companies, but I don’t think they’re evil, either. Their average profit is around 9%, which is above average for American business, but far less than many make. They are big and clumsy and horrible at public relations, but despite intense regulation of their industry, which limits their ability to find, produce, and refine oil, we don’t have lines or shortages at the gas pumps.

And the reason for that is that the price is determined by supply and demand. If the price were kept down, and the demand stayed the same, we’d run out at times like this.

While driving into Madison Sunday night, it was obvious that many more drivers than usual were driving 65 mph or less. The price was reducing their demand, via the accelerator pedal. If enough people slow down or drive less, that reduction in demand will cause a reduction in the price.

Just like at the grocery store, what things cost has to do with what we’ll pay for them, and just in case you were wondering, I got the half gallon size of milk. I’m just wondering what would happen if I put some in my gas tank…

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