Would you buy a 100 million dollar house if you liked it? How about a 100 dollar house… if you liked it? Since most of us can’t afford the former, and will never see the latter, the house we end up buying, if we buy a house, will necessarily be somewhere between these two extremes.
Whether it be houses, cars, milk or bread, there must, therefore, exist an exact price beyond which we will forgo our desire and keep our money.
Granted, while it does seem odd that one penny could break a deal on a transaction involving hundreds of thousands of dollars, like say a house, in reality one penny could. We can follow this logic by asking the question: “Would I still buy this house if it were one penny more? OK then, how about two penny’s more?” Simply repeat until the house is “too expensive”.
For this reason marketers grapple with each penny in the final price of something. They know that that penny may become one penny too much for someone, or some.
Corporations, from necessity, must constantly make decisions based on this fact. They must attempt to squeeze the most return for the buyer and themselves out of each penny. While such decisions can appear to have a slimy greedy feel to them when examined out of context, each of us make similar decisions daily without even realizing it. We could spend an hour walking to the store, which is safer; or we could spend 15 minutes driving to the store with higher risk of harm or death, to save 45 minutes, for example.
In the final analysis the lines are precise. Whether or not we extract resources, buy that thing, indeed every decision we make in an economy ultimately comes down to a line that exists between “not one cent more” and “that’s one penny too far”.
We’ve all heard, I hope, of the economic law of supply and demand. This law speaks of a relationship between the supply and the demand of resources, but this relationship can be misleading. There is a third and silent factor in this equation: “price”. Imagine, if you will, a see-saw. On one side is demand and the other is supply. Price is the center on which these two find balance… or at least should!
Consider mansions. It’s safe to say that we all want to live in a fine mansion, except that very few of us can afford to. The “demand” for mansions, therefore, is relatively low, because of price. But it’s obviously not fair that some people get to live in mansions while others don’t. Enter compassionate politician. As one such politician put it, “[mansion owners] have won life’s lottery”, and we know that’s not fair!
So the well-intentioned politician enacts price controls so that everyone can afford a mansion. Nice guy, he.
But then, without any changes in the supply of mansions, demand skyrockets. And guess what else. What was once an adequate supply of mansions is now a limited supply; a shortage in fact. Since all can now afford mansions, they are now “demanding” mansions. To further aggravate the situation, the supply begins to decline because there is no longer any incentive to build mansions because there’s no profit to be made.
Since bad law begets bad law, “No problem”says the compassionate politician. So a new law is legislated to deal with the mansion crisis. A lottery is instituted to determine who gets to live in the limited supply of remaining mansions. Now, everyone is equal because no one is living in a mansion because of “life’s” so called lottery, but rather, because of a government lottery. There, problem solved. Feel better now?