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Abstract:

This paper is exploring the psychological concept behind the economics of supply and demand. While we can only present the ideas in rudimentary form nevertheless we can see that over time the demands of the consumer have changed from the need to survive to the need to impress their wealth. Adam Smith the founder of modern economics in 1776 laid down the process and structure of trade with the foresight that a global economic model would change the very fabric of peoples wealth and lead to poverty becoming a bygone age – and in that belief Adam Smith could not have imagined from the English Industrial Revolution and Enlightenment that the psychology of goods for supply and there demand could change so much. (1. Wealth of the Nations 1776)

Introduction:

The principal of supply and demand can be seen in very simple terms – here I will use the Apple as a prime example. Markets are divided into Primary, what can be grown, took from the ground (oil / diamonds) and Secondary what we do with the Primary product by changing its form through manufacturing and assembly, (steel piping / cars) to finally Tertiary industries that support our social systems of work and leisure time, (insurance / travel agents). This simple division of systems helps to classify our working environment and how we move from simple process to complex systems. Apples therefore are from agriculture a Primary industry as the product initially was natural to certain regions of the world and an easy supply of food and important vitamins. Today of course through the science of cross fertilization apples now come in a variety of sizes, colours and shapes that pander to the needs of the consumer – ie you and me. For our example we shall just use the domestic standard apple that can be eaten directly from the tree or purchased from the supermarket.

Apples are a perishable product – they go bad over time. This element of time will focus on the price a consumer is willing to pay for it. Fresh, clean looking, tasteful apples can fetch a premium price depending on the demand from the consumer for this type of apple. However as the product declines over time in freshness and becomes on the verge of going bad – the price will fall to clear the apples from the market and make way for new fresher ones. If there is a bad harvest (due to disease of the crop, the wrong weather conditions for maximum yield or attack from pests) then the price maybe effected due to the quality and less quantity of the apples available for sale. If it is still a good product but now in short supply with a high demand from the consumer the price will be very high. If on the other hand the product is spoiled the price maybe very low to clear the stocks before they perish further. In order to keep the price high (the usual market price) stocks maybe destroyed deliberately in order to lower supply and keep demand artificially high in the market. (this is the tactic of the oil industry in lowering production in order to maintain the value of the oil overall). The European Union in the past have had mountains of fresh product that has been deliberately kept from the market to force consumers to pay higher prices. So in summery the demand in the market is driven my the need for the product, the quality of the product in comparison to similar products (other varieties of apples), its quality, freshness and taste and the elasticity of the price depending on shelf life (how long it lasts in the supermarket before going bad) and customer preferences. Supply can effect the price in that if demand for the apples is high and there is not enough apples to supply everyone, then a premium price can be sought for its sale. If however there is a surplus of apples ( a good year for yield) and demand is low then the price can fall to try and sell the produce as quickly as possible before deterioration. (Again suppliers can destroy part of the crop or throw them away to artificially keep the supply lower than the demand and so keep prices high.)

Import Export Effect:

International trade around the World means that if my country can grow good quality apples and your country cannot – then by exporting my excess produce to that country can create a demand for a product that is not easily obtainable in the importing country. In this situation often countries swap products that have demand in each nation state. Oil is traded for goods as oil is a much needed source of energy but is not always naturally in other countries or the demand of oil is so high in a first world economy they cannot supply their own demands and so import that energy from a country with a surplus of oil – or the country restricts its own people with oil to make money to buy nationally required products such as weapons for national security or war. Many poor nations with oil have to ask first world nations to come and extract the oil as they do not have the technology or money to do that for themselves, in return the oil companies from the West can use oil as a coin of exchange for western consumer goods that are in short supply in third world counties. Our example of apples can be seen as a product of exchange for oil that we might need for the surplus of apples we cannot consume in our own country as we over-produce beyond our own demand. Global companies rely heavily on the form of exchange by supply the demand of a overseas market and returning wealth or goods to its own economy. In a last note here, duty is a form of taxation in trade to protect home markets from dumping of cheap products (poor quality often) into their market and so creating unemployment and closure of factories in the home country that could not compete on price that maybe artificially fixed by foreign governments by using their own tax income to support the trade overseas. Countries like China heavily subsidizes companies to have an unfair advantage in the market and so create low prices that drive other countries companies out of business – then when the competition is eliminated they can drive the price up as the now only supplier of the product needed. (2, Pugel T 2012 Int Trade pgs 15 to 31) Trade wars start this way to protect home markets from unfair competition created by governments, Adam Smith in the Wealth of the Nations felt that a free trade system without governments was the only way the markets could ever be ethical. (3. Smith A 1776 pg 164)

Psychological Consumerism

How does psychological thought impact on supply and demand in a direct consumer behaviour over all this economic theory of trade? One thing economics never can predict is consumer behaviour as related to the psychological thought processes that make a buyer – like you and me – decide what to buy and how much. They can effect decisions at the – point of sale – with a special offer or free gift but ultimately continuous buying and demand is driven by psychological need for that product over time. In times of short demand consumers can switch to often alternatives that might not be as good but are adequate for consumer use at that time. As in our apple example – if the best cooking apples are not available for my pie or that they are too highly priced then an alternative cheaper apple may suffice for this time until I can buy my preferred apple later when prices reduce as demand has fallen. Consumers are not complete prisoners of economic theory except perhaps at a Global or National level where governments artificially alter the market through duty or taxes – this is the tactic of need where an alternative may not exist as in the supply of household electricity, gas, water and communications that can be manipulated against the consumers interests.

Motivation to buy is very dependent on the effort we are willing to expend in order to obtain what we desire or need. I high need product such as water needs a very low motivation to purchase because the choice is demand led. We need it. A nice new camera needs high motivation and effort to source the market, for price, brand, type of usage excreta. Our disposable income puts needs first and desires secondary once the initial needs are met and extra income is available for other purchases we can then consider further ( 4. Maslow – Hierarchy of Needs) however humans can overcome basic needs and actually do without some essentials in order to have what they desire. So our first motivational variable is actually – ability – followed by the opportunity to gain access to what we want. Many things can interfere with opportunity including, time, distractions and the complexity of obtaining the object. It takes years to study and we need to survive while we do it – so while the need is there the ability to wait for a future reward maybe too much. Much of this is due to personal relevance for example our self-concept of who we are or want to be. Our self control – chocolate today – fat tomorrow, the risk involved (heart disease) and inconsistency with our attitude towards health for example. Taste for chocolate and addiction can be stronger than the need for health or welfare.

Today one of the most common motivations is actually – social comparison – we look at others and desire to be what they are or have in order to feel good about ourselves – this can be from a low self esteem position (5. Berne E 1960 – Transactional Analysis) where we believe others are having a better quality of life because they own things we do not (bigger car / better clothes). Another motivation is group behaviour – wanting to be accepted by others – being part of the group cohesiveness – a feeling of belonging – so I purchase a society membership, where a uniform, badge or company logo – so I can belong.

Advertising is aimed at persuading us we have a need that might not be a necessity or required to sustain life – but appeal to our group behaviour and personal values we derive from being part of the group – ie Save the Planet consumers – like advertising that appeals to their values such as the word organic, 100% fresh, no added sugar, no animal testing – and other such slogans – often not actually true of the product that is being promoted or ignores the harmful effects in favour of positive messages. Part of this is feedback reactions in which we listen to others who may have bought our apples and recommend you do the same as they are so good. Advertising feel that appraisal theory informs our choices when we match person goals to their product or ignore the inconsistency in the message – chocolate is good for your sex life – but bad for your cholesterol – I might ignore the health message in favour of the desired message – a better sex life. The outcome here is far from the economists ideas of supply and demand – except the demand for something not essential but desirable even if it is in conflict with our values or high risk.

Humans often talk about common sense in everyday life – yet consistently actually ignore it and its consequences. The compulsion to drive fast to enjoy the thrill of danger – yet minimize the chances that I will actually come to any harm. I purchase fast powerful cars in a city environment that makes such a purchase a nonsense in the fact you can never get above 40 miles an hour and on the motorways are restricted to 70 miles an hour – yet we purchased a car that is capable of 200 miles an hour – perfect example of social comparison where I want to be seen by others to have high self esteem related to the car I own. Yet common sense tells us a much more economical slower electric powered vehicle would serve our needs better – but not our ego.

Branding is a perfect example of social comparison in society – having the label is more important than the money spent obtaining it – yet it actually functions in the exact same way as a cheaper non branded product – baby milk powder is a formula – dried cow or goat milk processed in the exact same way despite the label on the tin. Added ingredients often have little or no effect on the welfare of the child drinking it – in other words the cheapest and most expensive have roughly the same ingredients – yet we still purchase what we feel is safer or better looking container, than another company. An exception to this was the use of poisons in Chinese baby milk that caused kidney failure and deaths due to substituting a cheaper additive than was safe or researched – this led to consumers buying foreign made baby milk powder in preference to home products in China. These scandals in China are common, toys painted with lead, botulism in dog food and many other criminal tampering with products at the factory source. The need for market share and money can cause criminal activity in many parts of society.

Summery:

Supply and Demand is an economical concept that while in the wider global world can substantiate its theory as valid if over 300 years it is still vulnerable to the whims of psychological thought and processes that decide the variables of consumer choice – and while advertisers and manufacturers try desperately to influence and guess our future needs we the consumer still have the ultimate power to decide what to buy. I might like apples but I can get by without them – if the price is right and I feel the desire to eat one – then I have the power to purchase – no amount of hype will influence an educated person to buy a mobile phone and queue all night just to be the first to own it – social comparison is today more influential that supply and demand in what we purchase to raise our self esteem as psychologist have told us for over 150 years in more important to our well-being than health, wealth and a secure future. Today’s consumer is more interested in the here and now – and worry about the rest later.

References:

1. A Smith 1776 – Wealth of the Nations – Introduction pages 10 to 21 – Bantam Classics

2. Pugel T 2012 – International Trade – Global Edition 16 – McGraw Hill Education

3. A Smith 1776 – Wealth of the Nations – pg 164 – Bantam Classics

4. Hoyeer, MacInnis & Pieters 2010 – Consumer Behaviour pgs 44 – 65 – South Western Cengage Learning

5. Berne E 1974 – Transactional Analysis – What do you say after you say Hello – pg 31 – 36 Corgi Publishing

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Source by Stephen F. Myler